Uni Reading List
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International Economics: Theory and Policy cover

Economics

Economics

International Economics: Theory and Policy

Paul R. Krugman; Maurice Obstfeld; Marc J. Melitz

An undergraduate text in international economics covering both the trade and the finance halves of the field. It presents the main models of why countries trade and who gains, the instruments and politics of trade policy, and the macroeconomics of exchange rates, capital flows and international policy coordination, with boxes that connect the theory to recent events.

Prerequisites: Intermediate microeconomics and macroeconomics are helpful; a solid principles course and algebra suffice for most chapters.

Difficulty Level
Intermediate
Academic Level
Undergraduate
international economicsinternational tradeinternational financeexchange ratestrade policyTextbook

01 / Reading Guide

Reading Guide

Citation

Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2022). International Economics: Theory and Policy (12th ed.). Pearson.

Chapter Summary

The book has an introduction followed by 21 chapters in four parts, which Pearson describes as two halves: the first devoted to trade, the second to monetary questions. Pearson's overview says the text gives an intuitive introduction to theory and events together with detailed coverage of the policies put in place in response, and that the 12th edition draws lessons from the COVID-19 pandemic. Chapter numbers below follow the order of the contents, which begins with the Introduction.

Chapter 1: Introduction

The opening chapter that precedes the four parts.

Part 1, Chapters 2-8: International Trade Theory

The trade-theory part opens with "World Trade: An Overview" and then builds the main models in sequence. "Labor Productivity and Comparative Advantage: The Ricardian Model" and "Specific Factors and Income Distribution" come first, followed by "Resources and Trade: The Heckscher-Ohlin Model" and "The Standard Trade Model". The last two chapters move past the traditional models: "External Economies of Scale and the International Location of Production" and "Firms in the Global Economy: Export and Foreign Sourcing Decisions and Multinational Enterprises". The titles show a progression from country-level comparative advantage to firm-level decisions about exporting, sourcing and multinational activity.

Part 2, Chapters 9-12: International Trade Policy

Four chapters on policy: "The Instruments of Trade Policy", "The Political Economy of Trade Policy", "Trade Policy in Developing Countries" and "Controversies in Trade Policy". The part runs from the tools of policy to the politics behind them, then to developing countries and to contested issues.

Part 3, Chapters 13-18: Exchange Rates and Open-Economy Macroeconomics

This is the longest part. It starts with "National Income Accounting and the Balance of Payments" and then treats exchange rates in turn: "Exchange Rates and the Foreign Exchange Market: An Asset Approach", "Money, Interest Rates, and Exchange Rates", "Price Levels and the Exchange Rate in the Long Run" and "Output and the Exchange Rate in the Short Run". It ends with "Fixed Exchange Rates and Foreign Exchange Intervention". The sequence moves from the accounts, to the asset-market view of the exchange rate, to long-run and short-run determination, to fixed-rate regimes.

Part 4, Chapters 19-22: International Macroeconomic Policy

Four chapters on policy and institutions: "International Monetary Systems: A Historical Overview", "Financial Globalization: Opportunity and Crisis", "Optimum Currency Areas and the Euro" and "Developing Countries: Growth, Crisis, and Reform".

Key Concepts

Chapters 1-12: Trade theory and policy

  • Ricardian model: a model of comparative advantage based on labor productivity (Chapter 3).
  • Specific factors: a model of trade and income distribution (Chapter 4).
  • Heckscher-Ohlin model: trade based on resources (Chapter 5).
  • External economies of scale: scale effects outside the individual firm, tied to where production is located (Chapter 7).
  • Multinational enterprises: firm-level export, sourcing and foreign-investment decisions (Chapter 8).
  • Instruments of trade policy: the policy tools, and their political economy (Chapters 9-10).

Chapters 13-22: Exchange rates and international macroeconomic policy

  • Balance of payments: the national-income and international-accounts framework (Chapter 13).
  • Asset approach to exchange rates: the exchange rate as the price in a foreign exchange market (Chapter 14).
  • Foreign exchange intervention: how fixed rates are maintained (Chapter 18).
  • Optimum currency areas and the euro: when countries gain from sharing a currency (Chapter 21).
  • Financial globalization: both the opportunity and the crisis (Chapter 20).

Critical Analysis

Strengths

  • A clear two-part structure. Pearson divides the book into trade and money, and the part titles are explicit, so a student can find a topic quickly and a course can teach one half alone.
  • Models and policy together. Part 1 is theory and Part 2 is policy for trade; Part 3 is open-economy macro and Part 4 is international macroeconomic policy for finance. The pairing makes each half move from models to the policies that respond to them.
  • Firm-level trade. Chapter 8 on firms in the global economy goes beyond the country-level models of the earlier chapters to export, sourcing and multinational decisions.
  • Current events. Pearson says the 12th edition draws lessons from the COVID-19 pandemic and highlights important economic developments.

Limitations

  • Background for the finance half. Part 3 covers money, interest rates, price levels and output in relation to the exchange rate, so students who have not met basic macroeconomic models will probably need a refresher before the long-run and short-run exchange-rate chapters.
  • Two halves, little overlap. The trade half and the monetary half are largely separate, so a course that covers only one of them leaves close to half the book unused.

Where It Fits in the Course

Of the books in the international economics list, this is one of two full-length undergraduate texts covering both trade and finance. Salvatore and Hepp's International Economics is the other; its contents list 21 chapters, six on trade theory and five on trade policy before the finance half, with optional chapter appendices carrying the more rigorous proofs. Either can serve as the main text, and the choice is largely a matter of course preference. Feenstra and Taylor's Essentials of International Economics is a one-semester version of the authors' longer text and suits a shorter course.

Rodrik's The Globalization Paradox is a non-technical account of the economics and politics of globalisation, useful as companion reading for the policy chapters. Feenstra's Advanced International Trade and Uribe and Schmitt-Grohé's Open Economy Macroeconomics are graduate-level treatments of the trade and open-economy macro halves and follow naturally from Parts 1 and 3.

How to Use This Book

The book is for undergraduates who have completed principles of economics; intermediate microeconomics and macroeconomics help with the models in Parts 1 and 3. A course on trade only can use Chapters 1-12; a course on international finance can start from Chapter 13 and use Parts 3 and 4.

A practical plan: read the Introduction and "World Trade: An Overview" for orientation, then take the Ricardian model, specific factors, Heckscher-Ohlin and the standard trade model in the order the book gives them. Chapters 7 and 8 are natural extensions. In Part 2, read the instruments chapter before the political-economy chapter. For the finance half, take Chapters 13-18 in sequence, because the asset approach is the foundation for the long-run and short-run chapters. Part 4 can be selected by interest: the historical overview, financial globalization, the euro or developing-country crises.