Essentials of International Economics

Citation

Feenstra, R. C., & Taylor, A. M. (2014). Essentials of International Economics (3rd ed.). Worth Publishers.

Chapter Summary

The third edition is the one-semester version of the authors' full textbook International Economics, covering both halves of the field in sixteen chapters and about 720 pages. After an opening chapter, Chapters 2–9 cover international trade and Chapters 10–16 international macroeconomics. The publisher describes the parent text as connecting theory to empirical evidence and extending coverage beyond advanced economies to emerging markets and developing countries, and notes that this edition was updated with the Eurozone crisis.

Chapter 1: The Global Economy

An overview chapter that introduces the global economy and the topics of both parts of the book.

Chapter 2: Trade and Technology: The Ricardian Model

The trade half begins with the Ricardian model, in which differences in technology across countries determine the pattern of trade and the gains from it.

Chapter 3: Gains and Losses from Trade in the Specific-Factors Model

The specific-factors model is used to show that trade creates losers as well as winners within a country, depending on which factors of production are tied to which industries.

Chapter 4: Trade and Resources: The Heckscher-Ohlin Model

The Heckscher-Ohlin model explains trade by differences in countries' endowments of resources, such as capital and labour.

Chapter 5: Movement of Labor and Capital between Countries

The chapter extends trade theory from goods to factors of production, covering international migration and capital flows.

Chapter 6: Increasing Returns to Scale and Monopolistic Competition

This chapter moves beyond comparative advantage to trade driven by economies of scale and product variety under monopolistic competition.

Chapters 7–8: Import Tariffs and Quotas Under Perfect Competition; Import Tariffs and Quotas Under Imperfect Competition

Two chapters on trade policy analyse the effects of tariffs and quotas, first in competitive markets and then in markets with market power.

Chapter 9: International Agreements: Trade, Labor, and the Environment

The trade half ends with international agreements, including those dealing with labour and environmental standards.

Chapter 10: Introduction to Exchange Rates and the Foreign Exchange Market

The macroeconomics half opens with exchange rates and how the foreign exchange market works.

Chapters 11–12: Exchange Rates I: The Monetary Approach in the Long Run; Exchange Rates II: The Asset Approach in the Short Run

A pair of chapters builds a theory of exchange rates: the monetary approach for the long run and the asset approach for the short run.

Chapter 13: National and International Accounts: Income, Wealth, and the Balance of Payments

The chapter sets out how income, wealth and the balance of payments are measured in an open economy.

Chapter 14: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

This chapter combines output and exchange rates in a short-run model used to analyse monetary and fiscal policy.

Chapters 15–16: Fixed Versus Floating: International Monetary Experience; The Euro

The book closes with the choice of exchange-rate regime, examined through international monetary experience, and with the euro, where this edition adds the Eurozone crisis.

Key Concepts

Chapters 1–6: Why countries trade

• Comparative advantage: the Ricardian principle that countries gain by specialising in goods they produce at relatively lower opportunity cost.
• Specific factors and income distribution: the result that trade can harm owners of factors tied to import-competing industries.
• Factor endowments: the Heckscher-Ohlin explanation of trade by relative abundance of resources.
• Increasing returns and monopolistic competition: trade driven by scale economies and product variety.

Chapters 7–9: Trade policy

• Tariffs and quotas: import restrictions whose effects differ under perfect and imperfect competition.
• International trade agreements: rules among countries on trade, labour and the environment.

Chapters 10–16: International macroeconomics

• Foreign exchange market: where currencies are traded and exchange rates are determined.
• Monetary and asset approaches: long-run and short-run theories of exchange rates.
• Balance of payments: the accounts recording a country's transactions with the rest of the world.
• Exchange-rate regimes: the choice between fixed and floating rates, and monetary union in the case of the euro.

Critical Analysis

Strengths

• Both halves of the field in one semester. The book covers trade theory, trade policy, exchange rates, open-economy macroeconomics and monetary regimes in sixteen chapters, which makes it practical for a single introductory course that must cover both.
• Evidence and wider coverage. According to the publisher, the parent text ties theory to empirical evidence throughout and goes beyond the traditional focus on advanced countries to emerging markets and developing economies, a coverage that suits students interested in development and global policy.
• A standard modelling sequence. The trade chapters move from the Ricardian to the specific-factors and Heckscher-Ohlin models and then to increasing returns, and the macro chapters build from exchange rates to a short-run policy model. This sequence prepares students for intermediate and graduate texts that use the same building blocks.

Limitations

• Condensed from a longer text. The full International Economics is listed at over 900 pages, so this version of about 720 pages necessarily omits material from it. Students who want a topic in more depth, or the chapters not carried over, should consult the full edition.
• Dated data and events. Published in 2014, the edition's examples stop at the Eurozone crisis; later trade wars, the pandemic and recent exchange-rate episodes are absent.
• Requires principles of economics. The models assume familiarity with supply and demand and basic macroeconomics.

Where It Fits in the Course

This is the accessible textbook option in the international economics list for a one-semester course on both trade and finance. Krugman, Obstfeld and Melitz's International Economics: Theory and Policy and Salvatore and Hepp's International Economics are fuller undergraduate textbooks covering the same two halves with more chapters; choose one of them for a two-semester sequence or for more depth, and this book when time is limited. Dani Rodrik's The Globalization Paradox is a non-technical argument about the politics of globalization and makes good companion reading for Chapters 7–9 and 15–16.

For further study, Robert Feenstra's Advanced International Trade is a graduate text on trade models and their econometric testing, a natural continuation of Chapters 2–6 from the same author. Uribe and Schmitt-Grohé's Open Economy Macroeconomics is a graduate treatment of the macro half, building on the material in Chapters 10–16 with dynamic equilibrium models.

How to Use This Book

The book is aimed at undergraduates with a principles course in micro- and macroeconomics. The models use graphs and basic algebra.

A suggested plan for a one-semester course:

• Trade (Chapters 1–9): Chapters 2–4 are core and should be read in order, since each model builds on the previous one. Chapter 6 is essential for modern trade theory. Chapters 7–8 are the core of trade policy; Chapter 9 can be lighter if time is short.
• International macroeconomics (Chapters 10–16): Chapters 10–14 form a connected sequence from the foreign exchange market to the short-run policy model; read them in order. Chapters 15–16 apply the framework to regimes and the euro.
• Shorter courses: for a trade-only course use Chapters 1–9; for a finance-only course, Chapter 1 and Chapters 10–16.

Work through the diagrams in each chapter by redrawing them, and update the book's data and examples with current statistics, for instance on exchange rates and current accounts, to see whether the patterns still hold.