International Economics, 8th Edition,

Global Edition James Gerber

Visit to download the full and correct content document:
https://ebookmass.com/product/international-economics-8th-edition-global-edition-jam
es-gerber/
 This is a special edition of an established title widely used by colleges and
GLOBAL universities throughout the world. Pearson published this exclusive edition
for the benefit of students outside the United States and Canada. If you
GLOBAL
EDITION purchased this book within the United States or Canada, you should be aware EDITION

EDITION
GLOB AL
that it has been imported without the approval of the Publisher or Author.

James Gerber’s International Economics offers an introduction to both macro and micro

International Economics
components of international economics. Using real-life applications and examples, the text
makes economic theory and policy accessible to diverse groups of students, including those
pursuing economics specialization as well as non-specialization courses. This equips students
with an understanding of the entire spectrum of international economics without requiring
the use of higher-level mathematics. In addition, the text has a flexible approach, which
includes self-contained chapters and comprehensive coverage, allowing instructors to adapt
its concepts to a wide range of syllabi.

New To This Edition

• New – Chapter 4 now incorporates a comprehensive discussion of the gravity model of
trade. This discussion finds it as the most accurate one for predicting trade flows between
countries.
• New – Five new case studies, including ones on the collapse of Thailand’s currency in
1997–1998 and Brexit, highlight and build on core concepts and help students see theories
in action.
• New and Updated – Topics on the latest key economic trends and events, including the
role of economic institutions, the analysis of international economic policies, and the recent

EDITION
history of the world economy, supplement economic theory with real-world applications.

EIGHTH
Available separately for purchase is MyLab Economics for International Economics, the teaching
and learning platform that empowers instructors to personalize learning for every student.
When combined with Pearson’s trusted educational content, this optional suite helps deliver
the desired learning outcomes. International Economics
Gerber
EIGHTH EDITION

JAMES GERBER

CVR_GERB3998_08_GE_CVR_Ashford.indd All Pages 10/03/22 1:51 PM

 International Economics
James Gerber
San Diego State University

EIGHTH EDITION
GLOBAL EDITION

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong
Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan

A01_GERB3998_08_GE_FM.indd 1 09/03/2022 20:52

Cover Image by Aun Puttipong/Shutterstock

Pearson Education Limited

KAO Two
KAO Park
Harlow
CM17 9NA
United Kingdom

and Associated Companies throughout the world

Visit us on the World Wide Web at: www.pearsonglobaleditions.com

© Pearson Education Limited, 2023

The rights of James Gerber to be identified as the author of this work have been asserted by him in accordance with
the Copyright, Designs and Patents Act 1988.

Authorized adaptation from the United States edition, entitled International Economics, 8th Edition,
ISBN 978-0-13-689241-0 by James Gerber, published by Pearson Education © 2022.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written
permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright
Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.

All trademarks used herein are the property of their respective owners. The use of any trademark in this text does
not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such
trademarks imply any affiliation with or endorsement of this book by such owners. For information regarding
permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and
Permissions department, please visit www.pearsoned.com/permissions.

This eBook is a standalone product and may or may not include all assets that were part of the print version. It also
does not provide access to other Pearson digital products like MyLab and Mastering. The publisher reserves the right
to remove any material in this eBook at any time.

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

ISBN 10: 1-292-43399-X

ISBN 13: 978-1-292-43399-8
eBook ISBN 13: 9781292434025

Typeset in Times Ten LT Std 10/12 by Straive

eBook formatted by B2R Technologies Pvt. Ltd.
 For Monica and Elizabeth

A01_GERB3998_08_GE_FM.indd 3 09/03/2022 20:52

 This page is intentionally left blank

A01_GERB3998_08_GE_FM.indd 4 09/03/2022 20:52

 BRIEF CONTENTS

Preface  13

PART 1 Introduction and Institutions 23

Chapter 1 An Introduction to the World Economy 24
Chapter 2 International Economic Institutions Since World War II 40

PART 2 International Trade 63

Chapter 3 Comparative Advantage and the Gains from Trade 64
Chapter 4 Comparative Advantage and Factor Endowments 87
Chapter 5 Beyond Comparative Advantage 117
Chapter 6 The Theory of Tariffs and Quotas 139
Chapter 7 Commercial Policy 161
Chapter 8 International Trade and Labor and Environmental Standards 181

PART 3 International Finance 205

Chapter 9 Trade and the Balance of Payments 206
Chapter 10 Exchange Rates and Exchange Rate Systems 236
Chapter 11 An Introduction to Open Economy Macroeconomics 272
Chapter 12 International Financial Crises 298

PART 4 Regional Issues in the Global Economy 327

Chapter 13 The United States in the World Economy 328
Chapter 14 The European Union: Many Markets into One 353
Chapter 15 Trade and Policy Reform in Latin America 382
Chapter 16 Export-Oriented Growth in East Asia 409
Chapter 17 China and India in the World Economy 438

Glossary464
Index475
Suggested Readings are available at www.pearson.com/uk/

A01_GERB3998_08_GE_FM.indd 5 09/03/2022 20:52

 CONTENTS

Preface 13 Capital Flows and the Debt of

­Developing Countries (Chapters 2,
9, and 12) 36
PART 1 Introduction and Latin America and the World
Institutions23 ­Economy (Chapter 15) 36
Export-Led Growth in East Asia
Chapter 1 An Introduction to the (Chapter 16) 37
World Economy 24 China and India in the World
Introduction: International Economic ­Economy (Chapter 17) 37
­Integration 24 What Do International Economists Do? 37
Elements of International Economic Vocabulary 38 • Review Questions 38
­Integration 25
Chapter 2 International Economic
The Growth of World Trade 26
Capital and Labor Mobility 28 ­Institutions Since
Features of Contemporary World War II 40
International Economic Relations 30 Introduction: International Institutions
Trade and Economic Growth 32 and Issues Since World War II 40
Twelve Themes in International International Institutions 40
Economics33 A Taxonomy of International
The Gains from Trade and New Trade Economic Institutions41
Theory (Chapters 3, 4, and 5) 33 The IMF, the World Bank,
Wages, Jobs, and Protection and the WTO 41
(Chapters 3, 6, 7, and 8) 34 The IMF and World Bank 41
Trade Deficits (Chapters 9, 11, and 12) 34 The GATT, the Uruguay Round,
Regional Trade Agreements and the WTO 43
(Chapters 2, 13, and 14) 34 CASE STUDY: The GATT Rounds 45
The Resolution of Trade Conflicts Regional Trade Agreements 46
(Chapters 2, 7, and 8) 35 Five Types of Regional Trade
The Role of International Institutions Agreements47
(Chapters 2, 8, and 12) 35 CASE STUDY: Prominent Regional
Exchange Rates and the Macroeconomy Trade Agreements 47
(Chapters 10 and 11) 35 Regional Trade Agreements and
Financial Crises and Global Contagion the WTO49
(Chapter 12) 36 For and Against RTAs 50

A01_GERB3998_08_GE_FM.indd 6 09/03/2022 20:52

 Contents 7

The Role of International Economic CASE STUDY: Changing Comparative

­Institutions 51 Advantage in the Republic of
The Definition of Public Goods 52 ­Korea, 1960–2010 77
Maintaining Order and Reducing Comparative Advantage and
­Uncertainty 53 “Competitiveness”79
CASE STUDY: Bretton Woods 54 Economic Restructuring 80
Criticism of International Institutions 56 CASE STUDY: Losing Comparative
Sovereignty and Transparency 56 ­Advantage 82
Ideology57 Summary 84 • Vocabulary 85 •
Implementation and Adjustment Review Questions 85
Costs58
CASE STUDY: China’s Alternative to the Chapter 4 Comparative Advantage
IMF and World Bank: The AIIB 59 and Factor Endowments 87
Summary 60 • Vocabulary 61 • Introduction: The Determinants of
­Review Questions 61 ­Comparative Advantage 87
Modern Trade Theory 88
PART 2 International The HO Trade Model
Gains from Trade in the HO Model
88
89
Trade63 Trade and Income Distribution 92
The Stolper-Samuelson Theorem 93
Chapter 3 Comparative Advantage
The Specific Factors Model 95
and the Gains from Trade 64 CASE STUDY: Comparative Advantage
Introduction: The Gains from Trade 64 in a Single Natural Resource 97
Adam Smith and the Attack on Empirical Tests of the Theory of
­Economic Nationalism 64 Comparative Advantage 98
A Simple Model of Production Extensions of the HO Model 99
and Trade 66 The Gravity Model 100
Absolute Productivity Advantage The Product Cycle 100
and the Gains from Trade 66 CASE STUDY: United States–China
CASE STUDY: Gains from Trade in Trade102
Nineteenth-Century Japan 68 Foreign Trade Versus Foreign
Comparative Productivity Advantage Investment103
and the Gains from Trade 69 Off-Shoring and Outsourcing 105
The Production Possibilities Curve 70 CASE STUDY: Mexico’s Participation
Relative Prices 71 in Global Value Chains 107
The Consumption Possibilities Curve 71 The Impact of Trade on Wages and Jobs 108
The Gains from Trade 72 CASE STUDY: Do Trade Statistics Give a
Domestic Prices and the Trade Price 74 Distorted Picture of Trade Relations?
Absolute and Comparative Productivity The Case of the iPhone 3G 110
Advantage Contrasted 75 Migration and Trade 111
Gains from Trade with No Absolute Summary 113 • Vocabulary 114 •
­Advantage 76 Review Questions 115

A01_GERB3998_08_GE_FM.indd 7 09/03/2022 20:52

 8 Contents

Chapter 5 Beyond Comparative Analysis of Quotas 152

­Advantage 117 Types of Quotas 153
The Effect on the Profits of Foreign
Introduction: More Reasons to Trade 117
Producers153
Intraindustry Trade 118
Characteristics of Intraindustry Trade119
Hidden Forms of Protection 155
CASE STUDY: Intellectual Property
The Gains from Intraindustry Trade 121
Rights and Trade 156
CASE STUDY: United States
and Canada Trade 123 Summary 158 • Vocabulary 159 •
Review Questions 159
Trade and Geography 124
Geography, Transportation Costs, and CHAPTER 7 Commercial Policy 161
Internal Economics of Scale 124
Introduction: Commercial Policy,
CASE STUDY: The Shifting Geography
Tariffs, and Arguments for
of Mexico’s Manufacturing 125
Protection161
External Economies of Scale 126
Trade and External Economies 127 Tariff Rates in The World’s Major
Traders162
Industrial Policy 128
Industrial Policies and Market The Costs of Protectionism 164
Failure129 The Logic of Collective Action 165
Industrial Policy Tools 131 CASE STUDY: Agricultural Subsidies 166
CASE STUDY: Clean Energy Why Nations Protect Their Industries 168
and Industrial Policy 132 Revenue168
Problems with Industrial Policies 133 The Labor Argument 169
CASE STUDY: Do WTO Rules Prohibit The Infant Industry Argument 170
Industrial Policies? 134 The National Security Argument 170
Summary 136 • Vocabulary 137 • The Cultural Protection Argument 171
Review Questions 137 The Retaliation Argument 172
CASE STUDY: National Security
Chapter 6 The Theory of Tariffs ­Protection and the WTO 172
and Quotas 139 The Politics of Protection in the
Introduction: Tariffs and Quotas 139 United States 174
Analysis of a Tariff 139 Antidumping Duties 174
Consumer and Producer Surplus 140 Countervailing Duties 176
Prices, Output, and Consumption 141 Escape Clause Relief 176
Resource Allocation and Income Section 301177
Distribution143 National Security Protection 177
CASE STUDY: A Comparison of CASE STUDY: Economic Sanctions 177
Tariff Rates 145 Summary 179 • Vocabulary 180 •
Other Potential Costs 147 Review Questions 180
The Large Country Case 148
Effective Versus Nominal Rates CHAPTER 8 International Trade and
of Protection 149 Labor and Environmental
CASE STUDY: The Uruguay Standards181
and Doha Rounds 151 Introduction: Income and Standards 181

A01_GERB3998_08_GE_FM.indd 8 09/03/2022 20:52

 Contents 9

Setting Standards: Harmonization, Are Current Account Deficits

Mutual Recognition, or Separate? 182 Harmful?224
Labor Standards 184 CASE STUDY: Current Account
Defining Labor Standards 184 Deficits in the United States 225
CASE STUDY: Child Labor 185 International Debt 227
Labor Standards and Trade 188 CASE STUDY: Odious Debt 228
Evidence on Low Standards as a The International Investment Position 230
Predatory Practice 189
Summary 231 • Vocabulary 232 •
CASE STUDY: The International
Review Questions 232
Labour Organization 190
Appendix A:
Trade and the Environment 192
Measuring the International
Transboundary and Nontransboundary
Investment Position 233
Effects192
CASE STUDY: Trade Barriers and Appendix B:
­Endangered Species 194 Balance of Payments Data  234
Bureau of Economic Analysis 234
Alternatives to Trade Measures 195
International Financial Statistics 234
Labels for Exports 196
Balance of Payments Statistics 235
Requiring Home Country Standards 197
Increasing International Negotiations 198 Appendix C:
CASE STUDY: Global Climate Change 199 A Note on Numbers 235

Summary 201 • Vocabulary 202 • Chapter 10 Exchange Rates and

Review Questions 202 Exchange Rate
Systems236
PART 3 International Introduction: Fixed, Flexible, or
­Finance 205 In Between? 236
Exchange Rates and Currency Trading 237
Chapter 9 Trade and the Balance Reasons for Holding Foreign
of Payments 206 Currencies238
Introduction: The Current Account 206 Institutions239
The Trade Balance 207 Exchange Rate Risk 240
The Current and Capital Account The Supply and Demand for Foreign
Balances207 ­Exchange 241
Introduction to the Financial Account 210 Supply and Demand with Flexible
Types of Financial Flows 210 ­Exchange Rates 241
Limits on Financial Flows 216 Exchange Rates in the Long Run 242
CASE STUDY: The Crisis of 2007–2009 Exchange Rates in the Medium
and the Balance of Payments 217 Run and Short Run 246
CASE STUDY: The Largest Market
The Current Account and the
in the World 250
­Macroeconomy 218
The National Income and Product Fixed Exchange Rates 252
­Accounts 219 CASE STUDY: The End of the Bretton
National Savings and Current Woods System 256
Account Balances 222 The Real Exchange Rate 258

A01_GERB3998_08_GE_FM.indd 9 09/03/2022 20:52

 10 Contents

CASE STUDY: The Collapse of Chapter 12 International Financial

Thailand’s Currency, 1997–1998 260 ­Crises 298
Choosing the Right Exchange Introduction: The Challenge to Financial
Rate System 261 Integration298
CASE STUDY: Monetary Unions 263
Definition of a Financial Crisis 299
Single Currency Areas 265
Conditions for Adopting a Single Vulnerabilities, Triggers, and ­Contagion 302
­Currency 266 Vulnerability: Economic Imbalances 302
Vulnerability: Volatile Capital Flows 304
Summary 267 • Vocabulary 268 • How Crises Become International:
Review Questions 269
­Contagion 305
Appendix: CASE STUDY: The Mexican Peso
The Interest Rate Parity Condition 270 Crisis of 1994 and 1995 306

Chapter 11 An Introduction Issues in Crisis Prevention 309

Moral Hazard and Financial Sector
to Open Economy
Regulation310
­Macroeconomics 272 Exchange Rate Policy 311
Introduction: The Macroeconomy Capital Controls 311
in a Global Setting 272 CASE STUDY: The Asian Crisis of
Aggregate Demand and Aggregate 1997 and 1998 313
Supply273 Policies for Crisis Management 317
Fiscal and Monetary Policies 278 Reform of the International Financial
Fiscal Policy 278 ­Architecture 318
Monetary Policy 279 The Role of the IMF 318
CASE STUDY: Fiscal and Monetary Transparency and Private Sector
Policy during the Great ­Coordination 320
Depression281 CASE STUDY: The Global Crisis of 2007 320
Current Account Balances Revisited 284 Summary 324 • Vocabulary 325 •
Fiscal and Monetary Policies, Interest Review Questions 326
Rates, and Exchange Rates 285
Fiscal and Monetary Policy and the
­Current Account 286
PART 4 Regional Issues
The Long Run 288 in the Global
CASE STUDY: Argentina and the
Limits to Macroeconomic Policy 289
­Economy 327
Macro Policies for Current Account Chapter 13 The United States in
­Imbalances 291 the World Economy 328
The Adjustment Process 291 Introduction: A Changing
CASE STUDY: The Adjustment Process World Economy 328
in the United States 293
Background and Context 329
Macroeconomic Policy Coordination The Shifting Focus of U.S. Trade
in Developed Countries 294 ­Relations 330
Summary 295 • Vocabulary 296 • CASE STUDY: Manufacturing in
Review Questions 297 the United States 331

A01_GERB3998_08_GE_FM.indd 10 09/03/2022 20:52

 Contents 11

The Nafta Model 334 Monetary Union and the Euro 368
Demographic and Economic Costs and Benefits of Monetary
­Characteristics of North America 334 Union369
Canada–U.S. Trade Relations 335 The Political Economy of the Euro 371
Mexican Economic Reforms 337 CASE STUDY: The Financial Crisis
The North American Free Trade of 2007–2009 and the Euro 372
­Agreement 339 Widening the European Union 376
CASE STUDY: North America’s New Members 376
Automotive Value Chain 341 CASE STUDY: The United Kingdom
Trade Initiatives and Preferential Leaves the European Union 377
­Agreements 343 Future Challenges 378
CASE STUDY: The African Growth
Summary 380 • Vocabulary 381 •
and Opportunity Act 345 Review Questions 381
Jobs and Trade Agreements 346
CASE STUDY: The Gravitational Pull Chapter 15 Trade and Policy Reform
of the U.S. Economy  349 in Latin America 382
Summary 351 • Vocabulary 351 • Introduction: Defining a “Latin American”
Review Questions 352 Economy382
Population, Income, and Economic
Chapter 14 The European Union: Growth383
Many Markets into One 353
Import Substitution Industrialization 385
Introduction: The European Union 353 Origins and Goals of ISI 385
The Size of the European Market 355 Criticisms of ISI 388
The European Union and CASE STUDY: ISI in Mexico 389
Its Predecessors 356 Macroeconomic Instability and
The Treaty of Rome 356 Economic Populism 391
Institutional Structure 357 Populism in Latin America 392
Deepening and Widening the CASE STUDY: Economic Populism
Community in the 1970s and 1980s 359 in Peru, 1985–1990  393
Before the Euro 359 The Debt Crisis of the 1980s 394
The Second Wave of Deepening: Proximate Causes of the Debt Crisis 395
The Single European Act 361 Responses to the Debt Crisis 395
CASE STUDY: The Schengen Neoliberal Policy Reform and the
Agreement362 ­Washington Consensus 398
The Delors Report 363 Stabilization Policy to Control
Forecasts of the Gains from the Inflation399
­Single European Act 363 Structural Reform and Open Trade 400
Problems in the Implementation of CASE STUDY: Regional Trade Blocs
the SEA364 in Latin America 402
CASE STUDY: The Erasmus+ The Next Generation of Reforms 403
Program and Higher Education 366 CASE STUDY: The Chilean Model 405
The Third Wave of Deepening: The Summary 406 • Vocabulary 407 •
­Maastricht Treaty 367 Review Questions 408

A01_GERB3998_08_GE_FM.indd 11 09/03/2022 20:52

 12 Contents

Chapter 16 Export-Oriented Growth CASE STUDY: Asian Trade Blocs 433

in East Asia 409 Is There an Asian Model of Economic
Introduction: High-Growth Growth?434
Asian Economies 409 Summary 436 • Vocabulary 437 •
Population, Income, and Economic Review Questions 437
Growth411 Chapter 17 China and India in the
A Note on Hong Kong and Taiwan 413 World Economy 438
General Characteristics of Growth 413 Introduction: New Challenges 438
Shared Growth 413
Rapid Accumulation of Physical Demographic and Economic
and Human Capital 414
Characteristics439
Rapid Growth of Manufactured Economic Reforms in China and India 443
Exports415 The Reform Process in China 444
Stable Macroeconomic Environments 416 Indian Economic Reforms 445
Shifting Comparative Advantages 446
The Institutional Environment 417
CASE STUDY: Why Did the USSR
CASE STUDY: Worldwide Governance
Collapse and China Succeed? 448
Indicators418
Fiscal Discipline and Business–­ China and India in the World
Government Relations 420 Economy449
CASE STUDY: Doing Business in the Chinese and Indian Trade Patterns 450
Export Oriented Asian Tariffs and Protection 450
Economies420 Current Account Balances 452
Avoiding Rent Seeking 422 Looking Forward 453
CASE STUDY: Were East Asian Difficult Issues 455
Economies Open? 424 Services455
The Role of Industrial Policies 426 Manufacturing456
Targeting Specific Industries 426 Resources457
Did Industrial Policies Work? 427 Multilateral Institutions 458
CASE STUDY: HCI in Korea 429 Unresolved Issues 459
Conflict or Collaboration? 460
The Role of Manufactured Exports 430
The Connections between Growth Summary 462 • Vocabulary 463 •
and Exports 430 Review Questions 463
Is Export Promotion a Good Model Glossary 464
for Other Regions? 432 Index 475

A01_GERB3998_08_GE_FM.indd 12 09/03/2022 20:52

 PREFACE

International Economics is designed for a one-semester course covering both the trade
and finance components of international economics. The Eighth Edition continues the
approach of the first seven editions by offering a principles-level introduction to core
theories together with policy analysis and the institutional and historical contexts of
international economic relations. My goal is to make economic reasoning about the
international economy accessible to a diverse group of students, including both eco-
nomics majors and nonmajors. My intention is to present the consensus of economic
opinion, when one exists, and to describe the differences when one does not. In gen-
eral, however, economists are more often in agreement than not.

What’s New in the Eighth Edition

This Eighth Edition of International Economics preserves the organization and cover-
age of the Seventh Edition and adds several updates and enhancements. New to this
edition:
■■ Five new case studies cover Mexico’s participation in global value chains, the
collapse of Thailand’s currency in 1997–98, the North American automotive
value chain, North American trade through the lens of the gravity model of
trade, and the United Kingdom’s exit from the European Union.
■■ The growth of protectionism is woven into the discussion of trade policies
throughout the book.
■■ The gravity model of trade has a more complete presentation.

■■ Global value chains are introduced in the section on off-shoring.

■■ The national security argument for protection is discussed, along with the chal-
lenges it poses for the World Trade Organization.
■■ All tables and graphs have been updated.

Notable Content Changes

■■ Chapter 1’s minor revisions begin the discussion of the recently protectionist
direction in U.S. trade policy. While it is uncertain if this is a permanent or
temporary shift away from multilateral agreements and increasing openness,
13

A01_GERB3998_08_GE_FM.indd 13 09/03/2022 20:52

 14 Preface

it is an expression of the concerns about globalization and international

trade that are felt by many people around the world.
■■ Chapter 2 changes reflect the discussion begun in Chapter 1 by adding an
overview of the views of the opponents to regional trade agreements. Their
concerns are presented in terms of jobs, industries, and communities.
■■ Chapter 3 changes continue the discussion by highlighting and contrasting
the views of trade economists with the objections of protectionist inter-
ests. The idea of gains from trade is emphasized and differentiated from
the notion that every individual benefits from trade. The chapter points
out the complexity and uncertainty of disentangling the trade effects from
those caused by new communication, transportation, and information
technologies.
■■ Chapter 4 incorporates a discussion of the gravity model of trade. The
gravity model is presented as the most accurate model for predicting trade
flows between countries but is silent on the issue of the specific goods and
services traded and on the determinants of comparative advantage. The
section on outsourcing and off-shoring is rewritten to emphasize the role
of global value chains (GVCs) and is followed up with a new case study on
Mexico’s participation in GVCs.
■■ Chapter 5 has minor changes that refocus the case study on the WTO and
industrial policies in order to ask whether WTO rules prohibit the use of
industrial policies.
■■ Chapters 6 and 7 on commercial policy describe the problems created when
tariffs are applied to intermediate goods. They also discuss how the discon-
nect between wages and labor productivity reduces the bargaining power
of workers and alters the labor argument for protection. Chapter 7 explains
in more detail the problems associated with the national security argument
for protection and has a new case study that addresses the WTO’s rules for
using national security as a reason for increased tariffs.
■■ Chapter 8 adopts the position that labor and environmental standards
have become a part of many new trade agreements and are here to stay.
Since the efficacy of labor and environmental clauses in trade agreements
is uncertain, alternatives to trade measures are still worth considering.
■■ Chapter 9 retains most of the content from the previous edition. Given the
current rhetoric about U.S. trade deficits, it is worth emphasizing the sec-
tion that reviews the causes of current account deficits and the case study
of the U.S. deficit.
■■ Changes to Chapter 10 are mostly in its organization and a new case study.
Fixed exchange rates, including the gold standard, are discussed directly
after the section on flexible rates and before discussion of the real exchange
rate. A new case study on the collapse of Thailand’s currency in 1997–98
comes directly after the section on real rates.

A01_GERB3998_08_GE_FM.indd 14 09/03/2022 20:52

 Preface 15

■■ A very minor change to Chapter 11 introduces the change in U.S. and

European central bank policies that have enabled them to expand the types
of assets they purchase.
■■ Chapter 12 adds the concept of balance of payments crises to its list and
introduces the concept of asymmetric information in the section on moral
hazard and financial regulation. In addition, the case study on the Asian
Crisis of 1997–98 is condensed.
■■ Chapter 13 has major changes given the sudden redirection of U.S. trade
policy. These changes emphasize the challenges to the United States stem-
ming from the growth and development of the Chinese economy and the
U.S. shift toward unilateral trade actions. The focus on the NAFTA model
is retained since it is the basis for most subsequent U.S. trade agreements
even as it is replaced by the United States-Mexico-Canada Agreement
(USMCA). A new case study on the North American automotive value
chain replaces the earlier study on Mexico’s collective agriculture. The dis-
tinction between trade preference programs, trade initiatives, and bilateral
or plurilateral trade agreements is clarified and strengthened, and a new
case study uses the gravity model to discuss North American trade.
■■ Chapter 14 takes into account the departure of the United Kingdom from
the European Union with a new case study on the subject. It also improves
the discussion of EU institutions. The final section adds a discussion of the
challenge to the EU to find new institutional mechanisms for risk sharing
across the region.
■■ All relevant economic data are made current and up to date for Chapters
15 and 16.
■■ Chapter 17 highlights the advances of India and China and notes the
growing conflict between China and high-income economies. It has added
material on China’s Made in China 2025 initiative and its Belt and Road
Initiative. The problems for trade rules created by the extensive use of
state-owned enterprises are highlighted, as are intellectual property
enforcement and the forced transfer of technology.

Flexibility of Organization
A text requires a fixed topical sequence because it must order the chapters one
after another. This is a potential problem for some instructors, as there is a wide
variety of preferences for the order in which topics are taught. The Eighth Edition,
like the previous editions, strives for flexibility in allowing instructors to find their
own preferred sequence.
■■ Part 1 includes two introductory chapters that are designed to build vocab-
ulary, develop historical perspective, and provide background information
about the different international organizations and the roles they play in

A01_GERB3998_08_GE_FM.indd 15 09/03/2022 20:52

 16 Preface

the world economy. Some instructors prefer to delve into the theory chap-
ters immediately, reserving this material for later in the course. There is no
loss of continuity with this approach.
■■ Part 2 presents the trade and commercial policy side of international
economics. Part 2 can be taught before or after Part 3, which covers inter-
national finance. Part 2 includes six chapters that cover trade models
(Chapters 3–5) and commercial policy (Chapters 6–8). A condensed treat-
ment of this section could focus on the Ricardian model in Chapter 3 and
the analysis of tariffs and quotas in Chapters 6 and 7. Chapter 8 on labor
and environmental standards can stand on its own, although the preceding
chapters deepen student understanding of the trade-offs.
■■ Part 3 covers international finance. It begins with a discussion of the bal-
ance of payments that is followed by chapters on exchange rates, open
economy macroeconomics, and financial crises. Chapter 11 on open econ-
omy macroeconomics is optional. It is intended for students and instructors
who want a review of macroeconomics, including the concepts of fiscal and
monetary policy, in a context that includes current accounts and exchange
rates. If Chapter 11 is omitted, Chapter 12 (financial crises) remains acces-
sible as long as students have an understanding of the basic concepts of
fiscal and monetary policy. Chapter 12 relies most heavily on Chapters 9
(balance of payments) and 10 (exchange rates and exchange rate systems).
■■ Part 4 presents five chapters, each focused on a geographic area. These
chapters use theory presented in Chapters 3–12 in a similar fashion to the
economics discussion that students find in the business press, congressio-
nal testimonies, speeches, and other sources intended for a broad civic
audience. Where necessary, concepts such as the real rate of exchange are
briefly reviewed. One or more of these chapters can be moved forward to
fit the needs of a particular course.

Solving Teaching and Learning Challenges

Teaching and learning international economics has a number of inherent
challenges. In a one-semester course, instructors must carefully choose the
­material they will cover and what they will omit. Meanwhile, students f­ requently
­experience international economics as overly theoretical and too abstract. These
were two of the main concerns that led to the development of this text. In ­addition,
the rapidly evolving international economy has led to the creation of global value
chains, surprisingly frequent financial crises, intense debates about trade, trade
agreements, and migration, as well as many other new issues. Moved by these
trends and their impacts, many non-economics students with limited background
have signed up for introductory courses in international economics. This is an
ongoing opportunity for teaching international economics to a wider audience,
but it also poses challenges for the traditional course.

A01_GERB3998_08_GE_FM.indd 16 09/03/2022 20:52

 Preface 17

A Solid Foundation for International Economics

While writing the text and selecting topics to cover and to omit, I constantly asked
what students need to know. A one-semester course must leave out many topics.
My goal is to provide a solid foundation for advancing student interests and skills
for further study and, if this is to be their only course in international economics,
for guiding them to a level of competency and understanding of the many inter-
national forces around us.

Case Studies
One of the first choices in writing this book was to include several case studies in each
chapter that highlight and build on the core theories and ideas. This allows students
the opportunity to see theories in action and provides instructors with concrete ex-
amples of how theories can be used to analyze the forces behind everyday events.

International Economic Institutions

The positioning of the introduction to international institutions in Chapter 2 enables
students to understand the goals of those institutions and the constraints they
face. This is particularly useful when they encounter those and other institutions
in subsequent chapters. Throughout the text, there is more coverage of historical
and institutional details than is typical. As with Chapter 2, this helps illuminate the
relationships among economic theory, economic policy, and economic events.

Five World Regions

Another atypical component of the text is the final section, Part 4. It is organized into
five chapters, each focused on a different geographic area of the world. Instructors
may choose to skip some or all of this material without loss of continuity, although
many find it useful for highlighting economic theory in a real-world setting. Students
will also find it useful for seeing the deployment of theory as a tool for understand-
ing the challenges, opportunities, and actions of different national economies.

Vocabulary Checks and Study Questions

Each chapter has a set of five to seven learning objectives that are stated at the
beginning and individually repeated after the subchapter heading where the
objective is covered. This helps the students to learn in an organized and struc-
tured way. And finally, the end-of-the-chapter vocabulary and study questions are
designed for students to test their understanding.

Real-World Career Skills

Students who work with this text on international economics will gain numerous
career-building benefits.

Knowledge Application and Analysis

Students are exposed to a large number of new concepts and relationships
that they must appropriately apply. This requires them to recall the material,

A01_GERB3998_08_GE_FM.indd 17 09/03/2022 20:52

 18 Preface

express it in their own words, and apply it to real-life situations. Application

builds a­ nalytical skills, including the ability to break down concepts or ideas
into c­ omponent parts, and skills of synthesizing ideas to form new perspectives.
Analysis also requires students to practice using their judgment to evaluate ideas
and perspectives.

Critical Thinking
Critical thinking includes an understanding of the uses and limits of theory, but
it also includes skills such as the ability to organize, synthesize, and analyze infor-
mation. International economics is one of the subdisciplines of economics where
the gap between expert opinion and the views of the general public is widest.
Most of the propositions put forward by international economists are contro-
versial with some groups or even the general public. Consequently, the ability
to organize, synthesize, and analyze the arguments made and then to apply them
to real-world conditions is an essential skill for mastering international economics.

Strengthened Numeracy
Numeracy is the ability to work with, interpret, and understand numbers. Those
skills are directly covered in statistics and mathematical economics classes, but
in order to strengthen their ability to work with data, most students need to
experience numbers in their natural setting. The book offers many tables and
graphs and a few equations that call for interpretation, analysis, and comparison.
Students gain confidence and experience when they grapple with these types of
real-world information.

Cultural Competency
The world is large, and there are many different ways that national economies
exist in it. Throughout the text, there are examples drawn from a wide variety
of countries. Part 4 delves more deeply into five specific world regions where
students gain insight into the different ways countries solve the fundamental
economic problem. These features widen student perspectives and prepare them
for working in more diverse environments.

The Uses and Limits of Theories

Regardless of the career path a person takes, they need to understand the
theories most relevant to their work because theories are usually the foundation
for analysis and decision-making. All theories have limits, however, including
the theories that form the field of international economics. It is important to
know when conditions on the ground have exceeded the limits of theory. This
text requires mastery of several theories, while the examination of specific condi-
tions in countries and regions sometimes uncovers the limits of those theories.
Throughout the text, the case studies, and examples drawn from actual historical
conditions, help students practice applying theory and understanding their limits.

A01_GERB3998_08_GE_FM.indd 18 09/03/2022 20:52

 Preface 19

Supplementary Materials
For more information and resources, visit www.pearsonglobaleditions.com.

Acknowledgments
All texts are team efforts, even single-author texts. I owe a debt of gratitude to a
large number of people. At San Diego State University, I have benefited from the
opportunity to teach and converse with a wide range of students. My colleagues
in San Diego and across the border in Mexico have been extremely helpful. Their
comments and our conversations constantly push me to think about the core eco-
nomic ideas that should be a part of a college student’s education and to search for
ways to explain the relevance and importance of those ideas with greater clarity
and precision. Any failure in this regard is, of course, mine alone.
I am deeply grateful to Samantha Lewis, Thomas Hayward, Neeraj Bhalla,
­Sugandh Juneja, Bhanuprakash Sherla, Allison Campbell, Gopala Krishnan
­Sankar, and the MyLab team.
Finally, my gratitude goes to the numerous reviewers who have played an essential
role in the development of International Economics. Each of the following individuals
reviewed the manuscript, many of them several times, and provided useful com-
mentary. I cannot express how much the text has benefited from their comments.

Mary Acker, Iona College
Jeff Ankrom, Wittenberg
University
David Aschauer, Bates
College
H. Somnez Atesoglu,
Clarkson University
Titus Awokuse, University
of Delaware
Mohsen Bahmani-
Oskooee, University of
Wisconsin, Milwaukee
Richard T. Baillie, Michigan
State University
Mina Baliamoune-Lutz,
University of North Florida
Eugene Beaulieu,
University of Calgary
Ted Black, Towson
University
Bruce Blonigen, University
of Oregon
Lee Bour, Florida State
University
Byron Brown, Southern
Oregon University
Laura Brown, University of
Manitoba
Albert Callewaert, Walsh
College
Tom Carter, Oklahoma
City University
Srikanta Chatterjee,
Massey University, New
Zealand
Jen-Chi Cheng, Wichita
State University
Don Clark, University of
Tennessee
Raymond Cohn, Illinois
State University
Peter Crabb, Northwest
Nazarene ­University
David Crary, Eastern
Michigan University
Al Culver, California State
University, Chico
Joseph Daniels, Marquette
University
Alan Deardorff, University
of Michigan
Craig Depken II,
University of North
Carolina, Charlotte
John Devereaux, University
of Miami
K. Doroodian, Ohio
University
Carolyn Evans, Santa Clara
University
Noel J. J. Farley, Bryn
Mawr College
Ora Freedman, Stevenson
University
Lewis R. Gale IV,
University of Southwest
Louisiana
Kevin Gallagher, Boston
University
Ira Gang, Rutgers
University
John Gilbert, Utah State
University

A01_GERB3998_08_GE_FM.indd 19 09/03/2022 20:52

 20 Preface
James Giordano, Villanova
University
Amy Jocelyn Glass, Texas
A&M University
Joanne Gowa, Princeton
University
Gregory Green, Idaho
State University
Thomas Grennes, North
Carolina State University
Winston Griffith, Bucknell
University
Jane Hall, California State
University, Fullerton
Seid Hassan, Murray State
University
F. Steb Hipple, East
Tennessee State University
Paul Jensen, Drexel University
Ghassan Karam, Pace
University
George Karras, University
of Illinois at Chicago
Kathy Kelly, University of
Texas, Arlington
Abdul Khandker, University
of Wisconsin, La Crosse
Jacqueline Khorassani,
Marietta College
Sunghyun Henry Kim,
Brandeis University
Vani Kotcherlakota,
University of Nebraska at
Kearney
Corrine Krupp, Michigan
State University
Kishore Kulkarni,
Metropolitan State College
of Denver
Farrokh Langdana, Rutgers
University
Daniel Y. Lee,
Shippensburg University
Mary Lesser, Iona College
Benjamin H. Liebman,
Saint Joseph’s University
A01_GERB3998_08_GE_FM.indd 20
Susan Linz, Michigan State
University
Marc Lombard, Macquarie
University, Australia
Thomas Lowinger,
Washington State University
Nicolas Magud, University
of Oregon
Bala Maniam, Sam Houston
State University
Mary McGlasson, Arizona
State University
Joseph McKinney, Baylor
University
Judith McKinney,
Hobart & William Smith
Colleges
Howard McNier, San
Francisco State University
Michael O. Moore, George
Washington University
Stephan Norribin, Florida
State University
William H. Phillips,
University of South Carolina
Frank Raymond,
Bellarmine University
Donald Richards, Indiana
State University
John Robertson, University
of Kentucky Community
College System
Jeffrey Rosensweig, Emory
University
Marina Rosser, James
Madison University
Raj Roy, University of
Toledo
Michael Ryan, Western
Michigan University
George Samuels, Sam
Houston State University
Craig Schulman, University
of Arizona
William Seyfried, Winthrop
University
Eckhard Siggel, Concordia
University
David Spiro, Columbia
University
Richard Sprinkle,
University of Texas, El Paso
Ann Sternlicht, Virginia
Commonwealth University
Leonie Stone, State
University of New York
at Geneseo
Carolyn Fabian Stumph,
Indiana University,
Purdue University,
Fort Wayne
Rebecca Summary,
Southeast Missouri State
University
Jack Suyderhoud,
University of Hawaii
Kishor Thanawala,
Villanova University
Henry Thompson, Auburn
University
Cynthia Tori, Valdosta State
University
Edward Tower, Duke
University
Ross vanWassenhove,
University of Houston
Jose Ventura, Sacred Heart
University
Craig Walker, Oklahoma
Baptist University
Michael Welker, Franciscan
University
Jerry Wheat, Indiana State
University
Laura Wolff, Southern
Illinois University,
Edwardsville
Chong K. Yip, Georgia
State University
Alina Zapalska, Marshall
University
09/03/2022 20:52
 Preface 21

Global Edition Acknowledgments

Pearson would like to thank the following people for contributing to and reviewing the
Global Edition and sharing their insightful comments and suggestions:

Contributor
Gabriela Sterian, Romanian-American University

Reviewers
Jassem Alokla, University of Portsmouth
Merve Bernazoglu, Utrecht University
Natalie Chen, Warwick University

A01_GERB3998_08_GE_FM.indd 21 09/03/2022 20:52

 This page is intentionally left blank

A01_GERB3998_08_GE_FM.indd 22 09/03/2022 20:52

 1
PA R T

Introduction and
Institutions

M01_GERB3998_08_GE_C01.indd 23 23/02/22 8:22 AM

 CHAPTER

1 An Introduction to
the World Economy

Learning Objectives
After studying this chapter, students will be able to:

1.1 Discuss historical measures of international economic integration with data

on trade, capital flows, and migration.
1.2 Compute the trade-to-GDP ratio and explain its significance.
1.3 Describe three factors in the world economy today that are different from
the economy at the end of the first wave of globalization.
1.4 List the three types of evidence that trade supports economic growth.
1.5 Describe the employment possibilities and occupations open to students of
international economics.

INTRODUCTION: INTERNATIONAL ECONOMIC

INTEGRATION
In August 2007, a crisis erupted in the housing sector of the United States. At the time,
few people realized that the subprime mortgage crisis would become a demonstration
of international economic integration or that it would push the world economy to the
brink of collapse. The crisis grew through the remainder of 2007 and into 2008, so that
by the summer nearly all high-income economies were in deep distress. Contagion
from the crisis spread like an epidemic as banks and other financial firms collapsed
and solvent firms stopped lending. The scarcity of credit caused difficulties for busi-
nesses that could not find financing for their day-to-day operations, while, at the same
time, consumers cut back on their spending and businesses cut back on new invest-
ment. By the end of 2008, economies around the world were in recession, with the
notable exceptions of China, India, and the major oil producers.
In early 2020, another crisis, the deadly COVID-19 pandemic, caused national
economies to suddenly shut down and severely disrupted the international flow of
goods, services, and people. The effects are still developing as this text goes to print,
but even though the pandemic has an entirely different origin than the financial crisis
of 2007–09, both are examples of crises leading to severe economic recessions in many
countries around the world. Both are extreme examples, but they are not unique. The
Russian Crisis of 1998–99, the Asian Crisis of 1997–98, the Mexican Crisis of 1994–95,
the Latin American Debt Crisis of 1982–89, and a number of others caused major
24

M01_GERB3998_08_GE_C01.indd 24 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 25

damage to financial systems, businesses, and households, both in the places

where they originated and in many other countries.
The international integration of national economies has brought many bene-
fits to nations across the globe, including technological innovation, less expensive
products, and greater investment in regions where local capital is scarce, to name
a few. But it has also made countries vulnerable to economic problems that
have become more easily transmitted from one place to another. Given that the
benefits and costs of international economic integration are surrounded by con-
troversy, it is worth clarifying what we mean by the term international economic
integration, or globalization in the economic sphere. To help us understand these
forces better, a historical perspective is also useful.

ELEMENTS OF INTERNATIONAL ECONOMIC

INTEGRATION
LO 1.1 Discuss historical measures of international economic integration with
data on trade, capital flows, and migration.
LO 1.2 Compute the trade-to-GDP ratio and explain its significance.
LO 1.3 Describe three factors in the world economy today that are different
from the economy at the end of the first wave of globalization.
LO 1.4 List the three types of evidence that trade supports economic growth.

Most people would agree that the major economies of the world are more in-
tegrated than at any time in history. Given our instantaneous communications,
modern transportation, and relatively open trading systems, most goods can move
from one country to another without major obstacles and at relatively low cost.
For example, most cars today are made in fifteen or more countries after you consider
where each part is made, where the advertising originates, who does the accounting,
and who transports the components and the final product. Nevertheless, the proposi-
tion that today’s economies are more integrated than at any other time in history is not
simple to demonstrate. It is clear that our current wave of economic integration began
in the 1950s, with the reduction of trade barriers after World War II. In the 1970s,
many countries began to encourage financial integration by increasing the openness
of their capital markets. The advent of the Internet in the 1990s, along with the other
elements of the telecommunications revolution, pushed economic integration to new
levels as multinational firms developed international production networks and mar-
kets became ever more tightly linked.
Today’s global economy is not the first instance of a dramatic growth in eco-
nomic ties between nations, however, as there was another important period
between approximately 1870 and 1913. New technologies such as transatlantic
cables, steam-powered ships, railroads, and many others led the way, much as

M01_GERB3998_08_GE_C01.indd 25 23/02/22 8:22 AM

 26 Part 1   Introduction and Institutions

they do today. For example, when the first permanent transatlantic cable was
completed in 1866, the time it took for a New York businessperson to complete a
financial transaction in London fell from approximately three weeks to one day,
and by 1914 it had fallen to one minute as radio telephony became possible.
We have mostly forgotten about this earlier period of economic integration, and
that makes it easier to overestimate integration today. Instantaneous communica-
tions and rapid transportation, together with the easy availability of foreign products,
often cause us to lose sight of the fact that most of what we buy and sell never makes
it out of our local or national markets. We rarely pause to think that haircuts, res-
taurant meals, gardens, health care, education, utilities, and many other goods and
services are partially or wholly domestic products. In the United States, for example,
about 83.4 percent of goods and services are produced domestically, with imports
(16.6 percent) making up the remainder of what we consume (2014). By comparison,
in 1890 the United States made about 92 percent of its goods and services, a larger
share than today but not radically different.
The question as to whether we are more economically integrated today or
during some period in the past is not academic. Between the onset of World War
I in 1914 and the end of World War II in 1945, the world economy suffered a
series of human-made catastrophes that de-integrated national economies. Two
world wars and a global depression caused most countries to close their borders
to foreign goods, foreign capital, and foreign people. Since the end of World
War II, many of the economic linkages between nations have served to repair the
damage done during the first half of the twentieth century, but there is no reason
to think that events might not cause a similar decoupling in the future.
Understanding international economic integration requires us to define what
we mean by the term. Economists usually point to four criteria or measures for
judging the degree of integration, which are trade flows, capital flows, people
flows, and the similarity of prices in separate markets. The first three points are
relatively self-explanatory, while the similarity of prices refers to the fact that
integrated economies have price differences that are relatively small and are
due mainly to differences in transportation costs. Goods that can move freely
from a low-cost to a high-cost region should experience price convergence as
goods move from where they are plentiful and cheap to where they are relatively
scarcer and more expensive. All of these indicators—trade flows, factor (labor
and capital) movements, and similarity of prices—are measures of the degree of
international economic integration.

The Growth of World Trade

Since the end of World War II, world trade has grown much faster than world
output. One way to show this is to estimate the ratio of exports by all countries
to total production by all countries. In 1950, total world exports—which are
the same as world imports—are estimated to have been 5.5 percent of world
gross domestic product (GDP), a measure of total production. Sixty-three
years later, in 2013, they were approximately 30 percent of world GDP, nearly

M01_GERB3998_08_GE_C01.indd 26 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 27

six times more important relative to the size of the world economy. One impor-
tant measure of international trade in a nation’s economy is the sum of exports
plus imports divided by the GDP. Specifically, it is the value of all final goods
and services produced inside a nation during some period, usually one year.
The trade-to-GDP ratio is represented as follows:
Trade to GDP ratio = 1Exports + Imports 2 , GDP
The ratio does not tell us about a country’s trade policies and countries with
higher ratios do not necessarily have lower barriers to trade, although that is one
possibility. In general, large countries are less dependent on international trade
because their firms can reach an optimal production size without having to sell
to foreign markets. Consequently, smaller countries tend to have higher ratios of
trade to GDP.
Figure 1.1 shows the trade-to-GDP ratio for four countries between 1913 and
2013. The decline in trade between the onset of World War I and 1950 is clearly
visible in each country, as is the subsequent increase after 1950. Another pattern
shown in Figure 1.1 is the smaller ratios for the United States and Japan, which
have the largest populations, and the much higher ratio for the Netherlands,
which has the smallest population in the sample. In general, smaller coun-
tries trade more than larger ones since they cannot efficiently produce a wide
range of goods and must depend on trade to a greater extent. For example, if
the Netherlands were to produce autos solely for its own market, it would lack

FIGURE 1.1 Trade-to-GDP Ratios for Four Countries, 1913–2013

180
160
140
Trade-to-GDP Ratio

120
100
80
60
40
20
0
1913 1950 1973 2013

Netherlands United Kingdom Japan United States

Data from Maddison, A. (1991). “Dynamic Forces in Capitalist Development” © 1991 Oxford University
Press and The World Bank, World Integrated Trade Solution, © James Gerber.

M01_GERB3998_08_GE_C01.indd 27 23/02/22 8:22 AM

 28 Part 1   Introduction and Institutions

economies of scale and could not produce at a competitive cost, whereas the U.S.
market can absorb a large share of U.S. output. Hence, the trade-to-GDP ratio
measures the relative importance of international trade in a nation’s economy,
but it does not provide any direct information about trade policy or trade barriers.
Figure 1.1 gives a historical overview of the decline and subsequent return of
international trade after World War II, but it obscures important changes in the
composition of trade flows from early in the twentieth century to those at the
end of the century. Before World War I most trade consisted of agricultural com-
modities and raw materials, while current trade is primarily manufactured consumer
goods and producer goods (machinery and equipment). Consequently, today’s man-
ufacturers are much more exposed to international competition than was the case
in 1900. In addition, much of the growth of world trade since 1950 has been accom-
plished by multinational corporations. With production sites in multiple countries
and inputs that pass back and forth between affiliates, multinational corporations
have become dramatically important. This trend has been supported and encour-
aged by the telecommunications revolution and transportation improvements that
have lowered the costs of coordinating operations physically separated by oceans
and continents. And finally, it has also become possible to coordinate service op-
erations such as accounting and data processing from a great distance. In sum, trade
today is qualitatively different than in 1913, and the growth of the trade-to-GDP
ratio since 1950 does not tell the whole story.

Capital and Labor Mobility

In addition to exports and imports, factor movements also are an indicator of eco-
nomic integration. As national economies become more interdependent, labor
and capital should move more easily across international boundaries. Labor, how-
ever, is less mobile internationally than it was in 1900. Consider, for example, that
in 1890 approximately 14.5 percent of the U.S. population was foreign born, while
in 2010, the figure was 12.9 percent. In 1900, many nations had open door immi-
gration policies, and passport controls, immigration visas, and work permits were
exceptions rather than rules. The movement of people was severely restricted by
the two world wars and the Great Depression of the 1930s. In the 1920s, dur-
ing the interwar period, the United States sharply restricted immigration with
policies that lasted until the 1960s, when changes in immigration laws once again
encouraged foreigners to migrate to the United States.
On the capital side, measurement is more difficult, since there are several
ways to measure capital flows. The most basic distinction is between flows of
financial capital representing paper assets such as stocks, bonds, currencies, bank
accounts, and flows of capital representing physical assets such as real estate,
factories, and businesses. The latter type of capital flow is called foreign direct
investment (FDI). To some extent, the distinction between the two types of capi-
tal flows is immaterial because both represent shifts in wealth across national
boundaries and both make one nation’s savings available to another.

M01_GERB3998_08_GE_C01.indd 28 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 29

When we compare international capital flows today to a century ago, there

are two points to keep in mind. First, savings and investment are highly corre-
lated. That is, countries with high savings tend to have high rates of investment,
and low savings is correlated with low investment. If there were a single world
market in which capital flowed freely and easily, this would not necessarily be
the case. Capital would flow from countries with abundant savings and capital
to countries with low savings and capital, where it would find its highest returns.
Second, a variety of technological improvements increased capital flows in the
1800s, as they are doing today. Transoceanic cables and radio telephony have
already been mentioned, but capital flows also increased in the late 1800s because
there were new investment opportunities such as national railroad networks and
other infrastructure, both at home and abroad.
If we compare the size of capital flows today to the previous era of global-
ization, flows today are much larger but mainly because economies are larger.
Relative to the size of economies, the differences are not great and may even
favor the 1870 to 1913 period, depending on what is measured. Great Britain
routinely invested 9 percent of its GDP abroad in the decades before 1913, and
France, Germany, and the Netherlands were as high at times. For significant
periods, Canada, Australia, and Argentina borrowed amounts that exceeded
10 percent of their GDP, a level of borrowing that sends up danger signals in
the world economy today. In other words, it is hard to make the argument that
national economies have a historically unprecedented level of international capital
flows today.
While the relative quantity of capital flows today may not be that much dif-
ferent for many countries, there are some important qualitative differences.
First, there are many more financial instruments available now than there were a
century ago. These range from relatively mundane stocks and bonds to relatively
exotic instruments such as derivatives, currency swaps, and others. By contrast,
at the turn of the twentieth century, there were many fewer companies listed
on the world’s stock exchanges, and most international financial transactions
involved the buying and selling of bonds.
A second difference today is the role of foreign exchange transactions. In 1900,
countries had fixed exchange rates and firms in international trade or finance had
less day-to-day risk from a sudden change in the value of a foreign currency.
Many firms today spend significant resources to protect themselves from sudden
shifts in currency values. Consequently, buying and selling assets denominated
in foreign currencies is the largest component of international capital move-
ments. For example, according to the Bank for International Settlements in
Geneva, Switzerland, daily foreign exchange transactions in 2013 were equal to
$5.3 trillion. In 1973, at the end of the last era of fixed exchange rates, they were
$15 billion.
The third major difference in capital flows is that the costs of foreign financial
transactions have fallen significantly. Economists refer to the costs of obtaining
market information, negotiating an agreement, and enforcing the agreement as
transaction costs. They are an important part of any business’s costs, whether it

M01_GERB3998_08_GE_C01.indd 29 23/02/22 8:22 AM

 30 Part 1   Introduction and Institutions

is a purely domestic enterprise or a company involved in foreign markets. Due to

sheer distance, as well as differences in culture, laws, and languages, transaction
costs are often higher in international markets than in domestic ones. Today’s
lower transaction costs for foreign investment mean that it is less expensive to
move capital across international boundaries.
The volatile movement of financial capital across international boundar-
ies is often mistakenly regarded as a new feature of the international economy.
Speculative excesses and overinvestment, followed by capital flight and bank-
ruptcies, have occurred throughout the modern era, going back at least to the
1600s and probably earlier. U.S. and world history show a number of such cases.
Financial crises are not a new phenomenon, nor have we learned how to avoid
them—a fact driven home by the recent subprime mortgage crisis.

Features of Contemporary International Economic Relations

While international economic integration has been rapid, it does not appear to be
historically unprecedented. The trade-to-GDP ratio is about 50 percent higher in the
U.S. economy than it was in 1890, and manufacturers and service providers are more
exposed to international forces. Labor is less mobile than in 1900 due to passport
controls and work permits, but capital is more mobile and encompasses a larger
variety of financial forms. Prices in many U.S. and foreign markets tend to be similar,
although there are still significant differences. In quantitative terms, the differences
between today and 120 years ago may not be as great as many people imagine, but
qualitatively, a number of additional features of the world economy separate the
first decade of the twenty-first century from the first decade of the twentieth.

Deeper Integration High-income countries have low barriers to imports of

manufactured goods. There are some exceptions (processed foodstuffs and
apparel), but as a general rule import tariffs (taxes on imports) and other barri-
ers such as quotas (quantitative restrictions on imports) are much less restrictive
than they were in the middle of the twentieth century. As trade barriers came
down during the second half of the twentieth century, three other trends began
to intensify economic integration between countries. First, lower trade barriers
exposed the fact that most countries have domestic policies that are obstacles to
international trade. National regulations governing labor, environmental, and
consumer safety standards; rules governing investment location and performance;
rules defining fair and unfair competition; rules on government “buy-national”
programs; and government support policies for specific industries—all have little
impact on trade until formal trade barriers start to fall and trade volume increases.
These policies were not implemented to protect domestic industries from foreign
competition, and as long as tariffs were high and trade flows were limited, they
did not matter much to trade relations. Once tariffs fell, however, many forms of
domestic policies began to be viewed as barriers to increased trade. Economists
sometimes refer to the reduction of tariffs and the elimination of quotas as shallow
integration and negotiations over domestic policies that impact international trade

M01_GERB3998_08_GE_C01.indd 30 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 31

as deep integration. Deep integration is much more contentious than shallow

integration and much more difficult to accomplish since it involves domestic policy
changes that align a country with rules that are created abroad or at least negotiated
with foreign powers.
A second noticeable trend over the past few decades is that technologically
complicated goods such as smartphones and automobiles are made of com-
ponents produced in more than one country and, consequently, labels such as
“Made in China” or “Made in the USA” are less and less meaningful. Low tariffs
along with innovations in transportation and communication technologies have
enabled firms to locate production of the different components of a sophisticated
product in different countries. For example, the hardware for a 3G iPhone is pro-
duced in Germany, Korea, Japan, and the United States, and then it is assembled
in China. The most valuable share of the hardware is made in Japan, but no one
thinks of this device as a Japanese phone. In this case, as in many others, it is
not accurate to say the product is made in one particular country since the parts
come from all over and the product is the result of a multinational effort involv-
ing firms and workers from many different countries.
A third trend is the recent rise of organized movements opposed to interna-
tional trade. In part, these movements are responding to the two trends cited in
the previous paragraphs: deeper integration reduces national autonomy, and the
movement of production processes abroad appears to threaten the well-being of
national industries, communities, and families. Economic analysis that tries to sep-
arate the effects on economic security of international trade from those of changing
technology is difficult and incomplete. Nevertheless, the growth of organized op-
position to open trade is not the first such occurrence. During the first wave of
globalization, populist movements arose in opposition to international integra-
tion and the rise of giant industrial firms. Ultimately, national governments were
forced to devise ways to limit the power of industrial interests, and international
integration was reversed by World War I. How the current trend of growing anti-
international trade movements develops is anyone’s guess.

Multilateral Organizations At the end of World War II, the United States,
Great Britain, and their allies created a number of international organizations to
maintain international economic and political stability. Although the architects
of these organizations could not envision the challenges and issues they would
confront over the next fifty years, the organizations were given significant flex-
ibility, and they continue to play an important and growing role in managing the
issues of shallow and deeper integration.
The International Monetary Fund (IMF), the World Bank, the General
Agreement on Tariffs and Trade (GATT), the United Nations (UN), the World
Trade Organization (the WTO began operation in 1995 but grew out of the
GATT), and a host of smaller organizations have broad international participa-
tion. They serve as forums for discussing and establishing rules, as mediators of
disputes, and as organizers of actions to resolve problems. All of these organi-
zations are controversial and have come under increasing fire from critics who

M01_GERB3998_08_GE_C01.indd 31 23/02/22 8:22 AM

 32 Part 1   Introduction and Institutions

charge that they promote unsustainable economic policies or that they protect the
interests of wealthy countries. Others argue that they are unnecessary foreign en-
tanglements that severely limit the scope for national action. (Chapter 2 examines
this issue in detail.) These organizations are attempts to create internationally ac-
ceptable rules for trade and commerce and to deal with potential disputes before
they spill across international borders; they are an entirely new element in the
international economy.

Regional Trade Agreements Agreements between groups of nations are not

new. Free-trade agreements and other forms of preferential trade have existed
throughout history. What is new is the significant increase in the number of
regional trade agreements (RTAs) that have been signed in the past twenty years.
The formation of preferential trade agreements is controversial. Trade op-
ponents dislike the provisions that expose more of the national economy to
international competition, whereas some trade proponents dislike preferences
that favor countries included in the agreement at the expense of countries out-
side the agreement. The North American Free Trade Agreement (NAFTA),
the European Union (EU), the Mercado Común del Sur (MERCOSUR), and
the Asia Pacific Economic Cooperation (APEC) are examples of RTAs, but
more than 417 have been recorded by the World Trade Organization (2016).

Trade and Economic Growth

Many people are more than a little apprehensive about increased international
economic integration. The list of potential problems is a long one. More trade
may give consumers lower prices and greater choices, but it also means more
competition for firms and workers. Capital flows make more funds available for
investment purposes, but they also increase the risk of spreading financial cri-
ses internationally. Rising immigration means higher incomes for migrants and
lower labor costs or a better pool of skills for firms, but it also means more com-
petition in labor markets and, inevitably, greater social tensions. International
organizations may help resolve disputes, but they may also reduce national
sovereignty by putting pressure on countries to make operational changes.
Free-trade agreements may increase trade flows, but again, that means more
competition and more pressure on domestic workers and firms.
In general, economists remain firmly convinced that the benefits of trade out-
weigh the costs. There is disagreement over the best way to achieve different
goals (for example, how to protect against the harmful effects of sudden flows of
capital), but the general belief that openness to the world economy is a superior
policy to closing off a country is quite strong. To support this stance, economists
can point to the following kinds of evidence:
■■ Casual empirical evidence of historical experience
■■ Evidence based on economic models and deductive reasoning

■■ Evidence from statistical comparisons of countries

M01_GERB3998_08_GE_C01.indd 32 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 33

While none of these is conclusive by itself, together they provide solid support
for the idea that open economies generally grow faster and prosper more than
closed ones.
The historical evidence examines the experiences of countries that tried to iso-
late themselves from the world economy. There are the experiences of the 1930s,
when most countries tried to protect themselves from world events by shutting out
flows of goods, capital, and labor. This did not cause the Great Depression of the
1930s, but it did worsen it, and ultimately it led to the misery and tragedy of World
War II. There are also the parallel experiences of countries that were divided by
war, with one side becoming closed to the world economy, and the other side open.
Germany (East versus West), Korea (North versus South), and China (mainland
China before the 1980s versus Taiwan and Hong Kong) are the best examples.
Economic theory generally supports these examples by suggesting the causal
mechanisms that lead from trade to faster growth. Generally, the benefits of increased
innovation, competitive pressure to raise productivity levels, and access to new tech-
nologies and ideas that are fostered by trade are positive factors. On the consumer
side, trade provides a greater variety of goods and offers them at lower prices.
The statistical evidence of the benefits of more open economies comes from
comparisons of large samples of countries over different periods. While the sta-
tistical tests of the relationship between trade policy and economic growth suffer
from their own technical shortcomings, the results consistently show that more
open economies grow faster. These results cannot be viewed as absolutely con-
clusive, but together with trade theory and the casual empirical evidence drawn
from historical experiences, the available statistical analysis provides additional
support for the notion that trade is usually beneficial.

TWELVE THEMES IN INTERNATIONAL

ECONOMICS
Each of the twelve themes discussed next are examined in the chapters that fol-
low. These themes are overlapping and multidimensional and often go beyond
pure economics. International economic analysis cannot claim the final word, but
we hope it will provide you an analytically powerful and logically consistent
approach for thinking about the issues raised by these themes.

The Gains from Trade and New Trade Theory (Chapters 3, 4, and 5)
Why is international trade desirable? We have briefly addressed this issue, and we
will consider additional points as we continue. Given that economic analysis clearly
demonstrates that the benefits of international trade outweigh the costs, it is not sur-
prising that virtually all economists generally support open markets and increased
trade. The benefits of international trade were first analyzed in the late 1700s and
are perhaps the oldest and strongest finding in all of economics. More recently, econ-
omists have begun to analyze returns to scale within firms and industries. Under the

M01_GERB3998_08_GE_C01.indd 33 23/02/22 8:22 AM

 34 Part 1   Introduction and Institutions

label “New Trade Theory,” economists have demonstrated a number of new sources
of national welfare improvements due to international trade and added greater
sophistication to our understanding of market structure and trade effects.

Wages, Jobs, and Protection (Chapters 3, 6, 7, and 8)

International trade raises national welfare, but it does not benefit every member
of society. Workers in firms that cannot compete may be forced to find new jobs
or take pay cuts. The fact that consumers pay less for the goods they buy or that
exporters hire more workers may not help laid-off workers. Increased awareness
of the international economy has heightened the fears of people who feel vulner-
able to change. They are concerned that wages in high-income countries must fall
in order to compete with workers in low-wage countries and that their jobs may
be moved overseas. One of the key challenges for policymakers is to find the right
mix of domestic policies so that the nation benefits from trade without creating a
backlash from those individuals and industries that are hurt.

Trade Deficits (Chapters 9, 11, and 12)

In 1980, a comprehensive measure of trade accounts in the United States showed
that there was a slight surplus. Every year since then, the United States has had
a trade deficit, and the sum of the deficits since 2000 is more than $7.9 trillion
(2001 through 2010). The United States was not the only country running defi-
cits, but each year a country runs a deficit in its trade accounts, it must borrow
from abroad, essentially selling a piece of its future output in order to obtain
more goods and services today. As the United States and other countries bor-
rowed, China, Germany, Japan, and oil producers like Saudi Arabia and Russia
lent. These large imbalances in lending and borrowing played a key role in the
financial crisis of 2007–2009 and the development of economic conflicts between
the United States, China, and other nations.

Regional Trade Agreements (Chapters 2, 13, and 14)

Currently (2020) there are more than 303 regional trade agreements in force
around the world, and over 150 more have been negotiated but are not yet
active. There are agreements to reduce trade barriers on every continent that
include some of the world’s most important economies. For example, the
European Union (EU) allows free movement of goods, services, capital, and peo-
ple in its twenty-seven member countries and has similar agreements with several
additional non-EU nations. Mexico, Chile, Canada, and, until recently, the United
States are active in creating new agreements in the Americas, Asia, and Europe.
The ten members of the Association of South East Asian Nations (ASEAN) have
moved to create a free-trade zone, while individual countries have signed addi-
tional agreements. China has begun to build a set of extensive regional ties in
Asia and beyond, and Japan has signed a trade agreement with the European

M01_GERB3998_08_GE_C01.indd 34 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 35

Union. The pros and cons of these and other agreements are an active area of
economic analysis and will be considered in several chapters.

The Resolution of Trade Conflicts (Chapters 2, 7, and 8)

Commercial conflicts between nations cover a wide variety of issues and complaints.
In one sense these conflicts are routine, as the WTO provides a formal dispute resolu-
tion procedure that has the assent of most of the world’s nations. The WTO process
does not cover all goods and services, however, nor does it say much about a large
number of practices that some nations find objectionable. The ability of nations to
resolve conflicts without resorting to protectionist measures is one key to maintaining
a healthy international economic environment. Disputes can become acrimonious, so
it is imperative that differences of opinion are not permitted to escalate into a wider
disagreement. Trade wars are not real wars, but they are harmful nonetheless.

The Role of International Institutions (Chapters 2, 8, and 12)

The organization with the greatest responsibility for resolving trade disagree-
ments is the WTO. The WTO came into existence in 1995 and was an adaptation
of the GATT, which was created shortly after World War II. Resolving trade dis-
putes is only one of the new roles played by international organizations. Various
organizations offer development support, technical economic advice, emergency
loans in a crisis situation, and other services and assistance. These organizations
perform services that were not offered before World War II (development sup-
port), or that were done by a single country (lending in a crisis)—usually the
world’s greatest military power. They exist today only through the mutual con-
sent and cooperation of participating nations; without that cooperation, they
would dissolve. Their abilities are limited, however. They cannot prevent crises,
and they cannot make poor countries rich. They are also controversial and are
viewed by some as tools of the United States or as a threat to national indepen-
dence. They are very likely to grow in function, however, as many international
problems cannot be solved by individual nations alone.

Exchange Rates and the Macroeconomy (Chapters 10 and 11)

Seventeen of the twenty-seven members of the EU have adopted the euro as a com-
mon currency, and several more are preparing to join them in spite of the euro crisis
that began in 2011. Panama, El Salvador, and Ecuador use the U.S. dollar. Some
members of the U.S. Congress and some economists think that China artificially ma-
nipulates its currency to gain commercial advantages, and China’s leaders worry that
the United States might let the dollar sink in value to depreciate its foreign debt.
Exchange rate systems come in a variety of forms and link the domestic economy to
the rest of the world. They can help protect a country against harmful developments
outside its borders, but they can also magnify and transmit those developments to
the domestic economy. Exchange rates play a key role in the international economy.

M01_GERB3998_08_GE_C01.indd 35 23/02/22 8:22 AM

 36 Part 1   Introduction and Institutions

Financial Crises and Global Contagion (Chapter 12)

As international trade and investment barriers declined, and as new communi-
cations and transportation systems developed, increasing quantities of capital
flowed across national borders. These flows were encouraged by financial inno-
vation and a general spirit of deregulation that held sway in much of the world
from the late 1970s forward. Capital flows brought many desirable things, such
as investment, new technology, and higher consumption, but they also often out-
paced our ability to monitor and supervise and were frequently at the root of
financial crises, including the severe global crisis that began in 2007. Economists
are engaged in a broad discussion today, aimed at finding techniques for reduc-
ing the macroeconomic and financial volatility caused by capital flows without
hampering the new investment and lending that they provide.

Capital Flows and the Debt of Developing Countries

(Chapters 2, 9, and 12)
In 1996, the World Bank and the IMF began a debt relief program for a group of
forty-two countries labeled the Highly Indebted Poor Countries (HIPC). Thirty-
four of these countries are in Africa. At the same time, nongovernmental groups
and celebrities, such as Bono, began to lobby successfully for a reduction in the
debts of poor countries and for changes in the lending policies of rich countries.
In many parts of the world, problems of extreme poverty are compounded by
large foreign debts that are unlikely to be repaid and often require a constant
supply of new loans to pay interest on the old ones. The search for workable
solutions is complicated in the borrowing countries by economic shocks, cor-
ruption, and unsustainable economic policies. Common problems in the lending
countries include unwise loans to corrupt dictators and loans for some expensive
and unnecessary goods sold by rich countries.

Latin America and the World Economy (Chapter 15)

In Latin America, the 1980s are known as the Lost Decade. High levels of debt,
deep recessions, and hyperinflation caused the region to lose a decade of growth
and development. In response, many countries embarked on a profound shift
in their economic policies. They opened markets, allowed increased foreign
investment, signed trade agreements, and ended a long period of relative isolation
from the world economy. These policy changes became known as the Washington
Consensus and helped to bring an end to the Lost Decade, but few economists
think the policies were successful. Growth remained relatively low in many
places, financial crises continued to undermine economic gains, and traditional
issues of economic fairness were largely ignored. Latin American countries have
developed a wide variety of new policies and experiments as they try to reduce
poverty, generate prosperity, and provide opportunity for all their citizens.

M01_GERB3998_08_GE_C01.indd 36 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 37

Export-Led Growth in East Asia (Chapter 16)

Throughout the late 1980s and into the 1990s, it was hard to ignore the East Asian
“miracle.” While some economists point out that it was not really a miracle—just
a lot of hard work and sound economic policies—the growth rates of the “high-
performance Asian economies” were unique in human history. Rates of growth
of real GDP per person commonly reached 4 to 5 percent per year, with 6 to
8 percent not unusual. In 1997, an economic and financial crisis hit the region
hard. Although there were lingering effects, by 2000 the economies of the region’s
developing countries were growing at more than 7 percent a year. One of the
dominant traits of the countries in East Asia is the extent to which they are out-
ward looking and dependent on the growth of their manufactured exports.

China and India in the World Economy (Chapter 17)

China and India are the two largest populations in the world. Together, they
account for more than a third of humanity. Throughout much of the twentieth
century, however, neither country had significant impact on the world economy.
Change began in 1978, when China started its dramatic shift away from isola-
tionism. India’s transformation from a relatively closed economy toward greater
openness began in 1991 and has proceeded at a slower pace. Nevertheless, its
sheer population size coupled with the technical excellence of its scientists and
engineers has turned it into a growing force in the world economy. Low wages,
competitive firms, new technologies, and innovations in transportation and com-
munication networks have increased the presence of both countries in the world
economy and given rise to new tensions and new opportunities.

WHAT DO INTERNATIONAL ECONOMISTS DO?

LO 1.5 Describe the employment possibilities and occupations open to students
of international economics.
International economics can be a stand-alone major or, more often, a specialty within
the field of general economics. It is also frequently included within degree programs
in diplomacy, international relations, international studies, and international business.
Specialists in international economics have a wide range of opportunities to work at
home and abroad, and in any field that requires an understanding of international
finance, international trade, foreign relations, or conditions in foreign countries. This
includes many of the subfields of finance, such as banking, insurance, and investing, as
well as international organizations, think-tanks, governments, private companies in-
cluding law firms that do business internationally, and education. Many international
economists work as analysts in one capacity or another. For example, research analysts
provide background on market and business conditions in foreign countries; policy
analysts help governments, industries, and international organizations understand the

M01_GERB3998_08_GE_C01.indd 37 23/02/22 8:22 AM

 38 Part 1   Introduction and Institutions

influence of different policies on international trade and finance or the role of policies
in promoting economic development. Other possibilities include positions as market
or business analysts, international trade specialists, political risk specialists, and foreign
aid specialists. International economics is also excellent training to work as a journal-
ist in the fields of international business and international affairs, and the diplomatic
corps of every nation employs international economists to help gather economic
information about foreign economies and to report on conditions abroad.
There are a number of reasons why international economics prepares students
for many possible career opportunities. First, it requires some knowledge of the
world beyond one’s own country and culture. Understanding the challenges and
opportunities that other countries face is an important part of the training and an
invaluable asset in any organization with interests that cross national boundaries.
Second, the material is rigorously analytical and requires students to master and
apply abstract models in real-world contexts. Mastery of the core ideas also means
an understanding of the assumptions and limits of the models without tossing out
the insights they provide. In this sense, the ideas developed in international econom-
ics provide a variety of ways to examine economic conditions while maintaining a
high degree of realism regarding unique and special conditions. Third, students will
become knowledgeable in the reading and interpreting of charts and tables. This is
a skill that is much in demand because it helps individuals communicate clearly and
succinctly and makes the organization where they work more effective.

Vocabulary
deep integration shallow integration
foreign direct investment (FDI) tariffs
gross domestic product (GDP) trade-to-GDP ratio
quotas transaction costs
regional trade agreement (RTA)

Review Questions
1.1 How can globalization and international economic integration be measured?
1.2 Considering the criteria used for judging the degree of integration, what can
you tell about India? Is it more or less integrated than it was 20 years ago?
1.3 What does the trade-to-GDP ratio measure? Does a low value indicate that
a country is closed to trade with the outside world?
1.4 Describe the changes of trade-to-GDP ratio and the composition of trade for
leading industrial economies between 1910 and 1950.

M01_GERB3998_08_GE_C01.indd 38 23/02/22 8:22 AM

 Chapter 1   An Introduction to the World Economy 39

1.5 Trade and capital flows are described and measured in relative terms rather
than absolute terms. Explain the difference. Which term seems more valid—
relative or absolute? Why?
1.6 Factor movements are one of the indicators of economic integration. With
more interdependent relations between countries, labor should move easily
across international boundaries. However, it is less mobile internationally
today than it was in 1900. Explain.
1.7 What are the new issues in international trade and investment? In what sense
do they expose national economies to outside influences?
1.8 Describe the three kinds of evidence that economists use to support the asser-
tion that economies open to the world economy grow faster than economies
that are closed.
1.9 Name some job opportunities available to students of international e­ conomics.
What are the industries that require this expertise?

M01_GERB3998_08_GE_C01.indd 39 23/02/22 8:22 AM

 CHAPTER International

2 Economic
Institutions Since
World War II

Learning Objectives
After studying this chapter, students will be able to:

2.1 Classify the main types of international economic organizations with examples.
2.2 Identify economic circumstances in which the IMF, the World Bank, and
the WTO are active.
2.3 Compare the different levels of integration found in regional trade agreements
with examples.
2.4 Analyze the roles of international economic organizations.
2.5 Debate the pros and cons of international economic organizations.

INTRODUCTION: INTERNATIONAL INSTITUTIONS

AND ISSUES SINCE WORLD WAR II
LO 2.1 Classify the main types of international economic organizations with examples.
As World War II was drawing to a close, representatives from the United States, Great
Britain, and other Allied nations met in the small New Hampshire town of Bretton
Woods. The outcome of these meetings was a series of agreements that created an
exchange rate system (which lasted until 1971); the International Bank for Reconstruction
and Development (IBRD), also known as the World Bank; and the International
Monetary Fund (IMF). In 1946, two years after Bretton Woods, twenty-three nations
including the United States and Great Britain began talks on reducing their trade bar-
riers, leading to the General Agreement on Tariffs and Trade (GATT), which began
operation in 1948. This chapter focuses on these global economic institutions, their
history, their role in the world economy, and controversies surrounding their activities.

International Institutions
International economic institutions are an important feature of the world economy. When
social scientists try to explain the increasing integration of national economies after
World War II, one of the key explanations must be the increased stability and reduced
40

M02_GERB3998_08_GE_C02.indd 40 23/02/22 8:25 AM

 Chapter 2    International Economic Institutions Since World War II 41

uncertainty that these institutions help to create. Nevertheless, as international

economic integration has increased, these organizations have come under more
scrutiny and received much criticism. Before we look at their impact and some of
the criticisms levied at them, we should define what we mean by an institution.
When most people hear the word institution, they probably think of a formal
organization. However, economists tend to define institutions more abstractly.
For example, the “New Institutionalists,” led by economist Douglas North, have
argued that organizations are not institutions in themselves but are rather the
rules that govern behavior—telling us what is permissible and what is not and
acting as constraints that limit our actions.
Institutions can be formal or informal. A formal institution is a written set of
rules that explicitly state what is and is not allowed. The rules may be embodied
in a club, an association, or a legal system. An informal institution is a custom
or tradition that tells people how to act in different situations but without legal
enforcement. For example, informal institutions include the rules of socializing,
gift exchange, table manners, e-mail etiquette, and so on. In this chapter, the
term institution refers to both rules and organizations.

A Taxonomy of International Economic Institutions

International economic institutions come in many shapes and sizes. They can
be lobbying groups for a particular commodity or an international producer’s
association, the joint management by several nations of a common resource, trade
agreements or development funds for a select group of nations, or even global
associations. Although this chapter’s focus is on global economic institutions, it
is useful to look at a taxonomy of international economic institutions, from the
most limited and specific, to the most general. Table 2.1 shows five main types.

THE IMF, THE WORLD BANK, AND THE WTO

LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and
the WTO are active.
Three global organizations play a major role in international economic relations
and are central to this book: the International Monetary Fund (IMF), the World
Bank, and the World Trade Organization (WTO). The IMF and the World Bank
date from the end of World War II; the WTO began in 1995 and grew out of the
GATT, which it deepens and broadens. Accordingly, it is useful to know the his-
tory and function of the GATT as well as the WTO.

The IMF and World Bank

During World War II, the United States, Great Britain, and several other nations
held regular discussions about the shape of the postwar international economic
order. They wanted to avoid the mistakes of the 1920s and 1930s, when a lack

M02_GERB3998_08_GE_C02.indd 41 23/02/22 8:25 AM

 42 Part 1   Introduction and Institutions

TABLE 2.1 A Taxonomy of International Economic Institutions, with Examples

Type Examples
Commodity- or industry-specific organiza- ■■ Oil Producing and Exporting
tions: These range from trade associations, Countries (OPEC)
to international standards-setting bodies, to ■■ International Telecommunications
powerful cartels Union (ITU)
Commissions and agencies for managing ■■ International Boundary and Water
shared resources Commission (IBWC)
■■ Mekong River Commission
Development funds and banks ■■ Asian Development Bank
■■ Islamic Development Bank
International trade agreements involving ■■ North American Free Trade
a few nations (regional trade alliances or Agreement (NAFTA)
trade blocs) ■■ European Union
Global organizations for trade, develop- ■■ International Monetary Fund (IMF)
ment, and macroeconomic stability ■■ World Bank
■■ World Trade Organization (WTO)

of international cooperation led to the complete collapse of economic rela-

tions. The culmination of these talks was the Bretton Woods conference held
in July 1944, in Bretton Woods, New Hampshire. The agreement was largely a
result of negotiations between the United States and the United Kingdom and
led directly to the creation of the IMF and the IBRD, which later became the
World Bank.
The IMF began operation on December 27, 1945, with a membership of
twenty-nine countries. Over time, it added new members and is currently at
188 countries. The IMF provides loans to its members under different programs
for the short, medium, and long term. Each member is charged a fee, or quota,
as the price of membership. The size of the quota varies with the size of the
nation’s economy and the importance of its currency in world trade and pay-
ments. Important decisions within the IMF are made by vote with the weight of
each nation’s vote proportional to its quota. This gives the high-income coun-
tries of the world a voting power that is disproportionate to their population.
For example, the United States alone controls nearly 17 percent of the total
votes, and the seven largest high-income industrial economies (Canada, Italy,
France, Germany, Japan, the United Kingdom, and the United States) control
almost 45 percent. Some votes on IMF policy require a “super majority” of 85
percent, giving the United States a veto power on those particular issues. In
recent years, the asymmetry in quotas and votes has been under pressure from

M02_GERB3998_08_GE_C02.indd 42 23/02/22 8:25 AM

 Chapter 2    International Economic Institutions Since World War II 43

dynamic emerging economies that want more say in IMF policies and from
advanced economies that want to increase quotas paid by other members.
The most visible role for the IMF is to intercede, by invitation, whenever a
nation experiences a crisis in its international payments. For example, if a country
imports more than it exports, then it may run out of foreign exchange reserves.
Foreign exchange reserves are dollars, yen, pounds, euros, or another currency
(or gold) that is accepted internationally. In addition, the IMF has its own cur-
rency, called an SDR, or special drawing right. SDRs are based on a country’s
quota and are a part of its international reserves. If a country lacks reserves, it
cannot pay for its imports, nor can it pay the interest and principal it owes on its
international borrowings. This is one scenario that warrants a call to the IMF.
The IMF makes loans to its members, but it usually extracts a price above and
beyond the interest it charges. The price is an agreement by the borrower to
change its policies so that the problem cannot recur. If simple economic reforms
such as a cut in the value of the currency or limits on the central bank’s creation
of credit are insufficient to solve the problem permanently, then the IMF usually
requires a borrower to make fundamental changes in the relationship between
government and markets in order to qualify for IMF funds. These requirements
are known as IMF conditionality. For example, during the crisis of 1997–1998,
the IMF was the main provider of funds and expertise to East Asia, again, with
a great deal of controversy over the advice it gave and the conditions it imposed.
The IMF’s resources for dealing with crises are limited. When the United
States and other large economies experienced the crisis that began in 2007, IMF
resources were far from adequate for addressing the issues. In 2009, the largest
member countries voted to increase its resources to $750 billion, still far below
the amount necessary to stem a crisis in the United States or in other large econ-
omies. In part, this reflects the institution’s asymmetry, as high-income countries
are generally unwilling to give the IMF either the funds or the power to allow it
to intervene effectively in their economies.
The World Bank is the other major organization that emerged from the Bretton
Woods conference. It has the same membership and a similar structure. Members
buy shares that convey voting rights on policy proportional to the shares. The origi-
nal purpose of the World Bank was to provide financing mechanisms for rebuilding
Europe at the end of World War II; however, it was soon apparent that its capi-
tal reserves were inadequate to the task. In addition, the United States found it
politically preferable to have more direct control over the reconstruction funds
rather than routing them through an international organization. Hence, the job of
reconstruction was directed toward the newly created Marshall Plan, and the World
Bank moved toward assisting development in nonindustrial economies.

The GATT, the Uruguay Round, and the WTO

At the end of World War II, a third global economic organization, the International
Trade Organization (ITO), was proposed. If it had been created, the ITO’s job
would have been to establish rules relating to world trade, business practices,

M02_GERB3998_08_GE_C02.indd 43 23/02/22 8:25 AM

 44 Part 1   Introduction and Institutions

and international investment. U.S. opposition killed the idea of the ITO, how-
ever, and no such organization was created until 1995. Nevertheless, in 1946, while
they were still considering the idea of the ITO, twenty-three countries opened
negotiations over tariff reductions. These negotiations led to about 45,000 tariff
reductions affecting $10 billion, or one-fifth of world trade. In addition, a number
of agreements were made on rules for trade, with the expectation that the rules
would become a part of the ITO. Both the tariff reductions and the rules were
implemented in 1948; when the possibility of an ITO died in 1950, the agreements
on tariffs and trade rules remained in force as a separate agreement, known as
the General Agreement on Tariffs and Trade (GATT). The GATT has been very
successful in bringing down trade barriers gradually. One indicator is that inter-
national trade has grown over the past fifty years from 5 percent of world gross
domestic product (GDP) to over 31 percent in 2011.
The GATT functions through a series of trade rounds in which countries
periodically negotiate a set of incremental tariff reductions. Gradually, through
the Kennedy Round in the mid-1960s and the Tokyo Round of the 1970s, trade
rules other than tariffs began to be addressed, including the problems of dump-
ing (selling in a foreign market below cost or below a fair price), subsidies to
industry, and nontariff barriers to trade.
The GATT intentionally ignored the extremely contentious sectors of agricul-
ture, textiles, and apparel. In addition, trade in services was ignored because it was
not important. The accumulation of unresolved issues in these sectors, however,
along with the increased importance of nontariff trade barriers, led to the demand
for a new, more extensive set of negotiations. These demands culminated in the
Uruguay Round of trade negotiations that began in 1986. Among other outcomes,
the Uruguay Round created the World Trade Organization (1995). As of 2020, there
are 164 members and twenty-four additional governments with observer status.
The WTO continues trade talks and sector-specific discussions between com-
prehensive rounds of negotiations. For example, in 1997, sixty-nine countries
signed an agreement to open their telecommunication sectors, and another
seventy agreed to significant opening in their financial services sectors. In addi-
tion, every two years, trade ministers from the member countries meet to set the
WTO’s policy objectives. In 2001, trade ministers meeting in Doha, Qatar, agreed
to launch a new round of trade negotiations emphasizing issues of developing
countries. The Doha Round proposed a Doha Development Agenda to consider
trade issues of importance to developing countries. The key issues are farm sub-
sidies and agricultural protection and trade in services. These are highly sensitive
issues, and the Doha Round has reached an impasse. In all likelihood it will be
the first round of trade negotiations to fail since the start of the GATT in 1947.
Nevertheless, WTO member governments continue to negotiate specific issues,
and outside the WTO framework, small groups of countries continue a wide range
of negotiations aimed at greater market access and lower trade barriers.
The foundation of all WTO and GATT agreements are the principles of national
treatment and nondiscrimination. National treatment is the requirement that foreign
goods are treated similarly to the same domestic goods once they enter a nation’s

M02_GERB3998_08_GE_C02.indd 44 23/02/22 8:25 AM

Another random document with
no related content on Scribd:
to act for him. Throughout, Osterman saw to it that he personally did
not appear.
Of course Greasadick, when he discovered what the plot was,
roared and charged like a bull. Indeed before he was eventually
defeated he became very threatening and dangerous, attempting
once even to kill Drewberry. Yet he was finally vanquished and his
holdings swept away. With no money to make a new start and
seeing others prosper where he had failed for want of a little capital,
he fell into a heavy gloom and finally died there in Larston in the bar
that had been erected after the K. B. & B. spur had been completed.
Through all of this Mr. Osterman appears to have been utterly
indifferent to the fate of the man he was undermining. He cared so
little what became of him afterwards that he actually admitted, or
remarked to Whitley, who remained one of his slaves to the end, that
one could scarcely hope to build a large fortune without indulging in
a few such tricks.
3. Lastly, there was the matter of the C. C. and Q. L. Railroad, the
major portion of the stock of which he and Frank O. Parm, of the
Parm-Baggott chain of stores, had managed to get hold of by the
simple process of buying a few shares and then bringing
stockholders’ suits under one and another name in order to
embarrass President Doremus and his directors, and frighten
investors so they would let go of the stock. And this stock, of course,
was picked up by Osterman and Parm, until at last these two
became the real power behind the road and caused it to be thrown
into the hands of a receiver and then sold to themselves. That was
two years before ever Michael Doremus, the first president of the
road, resigned. When he did he issued a statement saying that he
was being hounded by malign financial influences and that the road
was as sound as ever it had been, which was true. Only it could not
fight all of these suits and the persistent rumors of mismanagement
that were afoot. As a matter of fact, Mr. Doremus died only a year
after resigning, declaring at that time that a just God ruled and that
time would justify himself. But Mr. Osterman and Mr. Parm secured
the road, and finally incorporated it with the P. B. & C. as is well
known.
 III

Some data taken from the biographic study of the late J. H.

Osterman, multimillionaire and oil king, prepared for Lingley’s
Magazine and by it published in its issue for October, 1917.
In order to understand the late J. H. Osterman and his great
success and his peculiar faults one would first have to have known
and appreciated the hard and colorless life that had surrounded him
as a boy. His father, in so far as I have been able to ascertain, was a
crude, hard, narrow man who had been made harder and, if
anything, cruder by the many things which he had been compelled to
endure. He was not a kind or soft-spoken man to his children. He
died when John Osterman, the central figure of this picture, was
eleven. Osterman’s mother, so it is said, was a thin and narrow and
conventional woman, as much harried and put upon by her husband
as ever he was by life. Also there was one sister, unattractive and
rough-featured, an honest and narrow girl who, like her mother,
worked hard up to nineteen, when her mother died. After that, both
parents being dead, she and her brother attempted to manage the
farm, and did so fairly successfully for two years when the sister
decided to marry; and Osterman consenting, she took over the farm.
This falling in with his mood and plans, he ceased farming for good
and betook himself to the Texas oil fields, where he appears to have
mastered some of the details of oil prospecting and refining.
But before that, what miseries had he not endured! He was wont
to recount how, when grasshoppers and drought took all of their
crops for two years after his father’s death, he and his mother and
sister were reduced to want and he had actually been sent to beg a
little cornmeal and salt from the local store on the promise to pay,
possibly a year later. Taxes mounted up. There was no money to buy
seed or to plant or replace stock, which had had to be sold. The
family was without shoes or clothes. Osterman himself appeared to
be of the fixed opinion that the citizens and dealers of Reamer, from
near which point in Kansas he hailed, were a hard and grasping
crew. He was fond of telling how swift they were to point out that
there was no help for either himself or his mother or sister as farmers
and to deny them aid and encouragement on that score. He once
said that all he ever heard in the local branch of his mother’s church,
of which he was never a confessing communicant, was “an eye for
an eye, a tooth for a tooth”; also “with whatsoever measure ye mete
it shall be measured to you again.” Obviously such maxims taken
very much to heart by a boy of his acquisitive and determined nature
might bring about some of the shrewd financial tricks later accredited
to him. Yet he appears to have been a man of some consideration
and sympathy where boys were concerned, for it was said that he
made it a rule in all his adventures to select the poorest if most
determined youths of his organization for promotion and to have
developed all of his chief lieutenants from the ranks of farm or
orphan boy beginners whom he encouraged to work for him. How
true this is the writer is not able to state. However, of the forty or
more eminent men who have been connected with him in his
enterprises, all but four were farm or orphan boys who had entered
his enterprises as clerks or menials at the very bottom, and some
seven of the total were from his native State, Kansas.

IV

The private cogitations of the late John H. Osterman in his

mansion at 1046 Fifth Avenue, New York, and elsewhere during the
last five years of his life.

Oh, but those days when he had been working and scheming to
get up in the world and was thinking that money was the great thing
—the only thing! Those impossible wooden towns in the Northwest
and elsewhere in which he had lived and worked, and those worse
hotels and boarding-houses—always hunting, hunting for money or
the key to it. The greasy, stinking craft in which he had made his way
up weedy and muddy rivers in Honduras and elsewhere—looking for
what? Snakes, mosquitoes, alligators, tarantulas, horned toads and
lizards. In Honduras he had slept under chiqua trees on mats of
chiqua leaves, with only a fire to keep away snakes and other things.
And of a morning he had chased away noisy monkeys and
parroquets from nearby branches with rotten fruit so as to sleep a
little longer. Alone, he had tramped through fever swamps, pursued
by Pequi Indians, who wanted only the contents of his wretched
pack. And he had stared at huge coyal palms, a hundred feet high,
with the great feathery leaves fifteen feet long and their golden
flowers three feet high. Ah, well, that was over now. He had shot the
quetzal with its yellow tail feathers three feet long and had traded
them for food. Once he had all but died of fever in a halfbreed’s hut
back of Cayo. And the halfbreed had then stolen his gun and razor
and other goods and left him to make his way onward as best he
might. That was life for you, just like that. People were like that.
And it was during that time that he had come to realize that by no
honest way at his age was he likely to come to anything financially.
Roaming about the drowsy, sun-baked realm, he had encountered
Messner, an American and a fugitive, he guessed, and it was
Messner who had outlined to him the very scheme by which he had
been able, later, to amass his first quick fortune in New York. It was
Messner who had told him of Torbey and how he had come up to
London from Central Africa to offer shares in a bogus rubber
enterprise based on immense forests which he was supposed to
have found in the wilds of Africa yet which did not exist. And it was
the immense though inaccessible rubber forests in Honduras that
had inspired him to try the same thing in New York. Why not? A new
sucker was born every minute, and he had all to gain and nothing to
lose. Messner said that Torbey had advertised for a widow with some
money to push his enterprise, whereupon he had proceeded to tell
the London speculative public of his treasure and to sell two pound
shares for as low as ten shillings in order to show tremendous rises
in value—to issue two million pounds’ worth of absolutely worthless
stock.
By these methods and by having the stock listed on the London
curb he was able to induce certain curb or “dog” brokers to go short
of this stock without having any of it in their possession. Finally they
began to sell so freely and to pay so little attention to the amount that
was being sold that it was easy for Torbey to employ agents to buy
from all of them freely on margin. And then, as the law of the curb
and the state permitted, he had demanded (through them, of course)
the actual delivery of the shares, the full curb value of the stock
being offered. Of course the brokers had none, although they had
sold thousands; nor had any one else except Torbey, who had seen
to it that all outstanding stock had been recalled to his safe. That
meant that they must come to Torbey to buy or face a jail sentence,
and accordingly they had flocked to his office, only to be properly
mulcted for the total face value of the shares when they came.
Well, he had done that same thing in New York. Following the
example of the good Torbey, he had picked up a few unimportant
options in Honduras, far from any railroad, and had come to New
York to launch Calamita. Just as Torbey had done, he had looked for
a rich widow, a piano manufacturer’s wife in this case, and had
persuaded her that there were millions in it. From her he had gone
on to Wall Street and the curb and had done almost exactly as
Torbey had done.... Only that fellow De Malquit had killed himself,
and that was not so pleasant. He hadn’t anticipated that anything like
that would happen! That unfortunate wife of his. And those two
children made orphans. That was the darkest spot. He hadn’t known,
of course, that De Malquit himself was helping orphans—or—And
from there he had gone on to the forests of Washington and Oregon,
where he had bought immense tracts on which even yet he was
realizing, more and more. And from there it had been an easy step to
oil in southern California and Mexico—Ah, Greasadick, another sad
case!—And from there to mines and government concessions in
Peru and Ecuador, and the still greater ones in Argentina and Chile.
Money came fast to those who had it. At last, having accumulated a
fortune of at least nine millions, he had been able to interest Nadia,
and through her the clever and well-to-do fashionable set who had
backed his projects with their free capital. And by now his fortune
had swollen to almost forty millions.
But what of it? Could he say he was really content? What was he
getting out of it? Life was so deceptive; it used and then tossed one
aside. At first it had seemed wonderful to be able to go, do, act, buy
and sell as he chose, without considering anything save whether the
thing he was doing was agreeable and profitable. He had thought
that pleasure would never pall, but it had. There was this thing about
age, that it stole over one so unrelentingly, fattening one up or
thinning one down, hardening the arteries and weakening the
muscles and blood, until it was all but useless to go on. And what
was the import of his success, anyhow, especially to one who had no
children and no friends worthy of the name? There was no such
thing as true friendship in nature. It was each man for himself,
everywhere, and the devil take the hindmost. It was life that used
and tossed one aside, however great or powerful one might be.
There was no staying life or the drift of time.
Of course there had been the pleasure of building two great
houses for Nadia and living in them when he was not living in other
parts of the world. But all that had come too late; he had been too
old to enjoy them when they did come. She had been a great catch
no doubt, but much too attractive to be really interested in him at his
age. His wealth had been the point with her—any one could see that;
he knew it at the time and would not now try to deceive himself as to
that. At the time he had married her she had had social position
whereas he had none. And after she married him all her social
influence, to be sure, had been used to advance his cause. Still, that
scheme of hers to get him to leave his great fortune to those two
worthless sons of hers. Never! They were not worthy of it. Those
dancing, loafing wasters! He would see to it that his fortune was put
to some better use than that. He would leave it to orphans rather
than to them, for after all orphans in his employ had proved more
valuable to him than even they had, hadn’t they?—That curious
fellow, De Malquit!—So long ago. Besides wasn’t it Nadia’s two sons
who had influenced their mother to interest herself in D’Eyraud, the
architect who had built their two houses and had started Nadia off on
that gallery idea. And not a picture in it that would interest a sensible
person. And wasn’t it because of her that he had never troubled to
answer the letters of his sister Elvira asking him to educate her two
boys for her. He had fancied at the time that taking her two children
into his life would in some way affect his social relations with Nadia
and her set. And now Elvira was dead and he did not know where
the children were. He could charge that to her if he wanted to,
couldn’t he?
Well, life was like that. When he had built his two great houses he
had thought they would prove an immense satisfaction to him, as
they had for a time; but he would not be here much longer now to
enjoy them. He wasn’t nearly as active as he had been, and the sight
of the large companies of people that came to pose and say silly
things to each other was very wearying. They were always civil to
him, of course, but little more. They wanted the influence of his
name. And as long as he permitted it, his homes would be haunted
by those who wished to sell him things—stocks, bonds, enterprises,
tapestries, estates, horses. And those two boys of hers, along with
Nadia herself where her so-called art objects were concerned, so
busy encouraging them! Well, he was done with all that now. He
would not be bothered. Even youth and beauty of a venal character
had appeared on the scene and had attempted to set traps for him.
But his day was over. All these fripperies and pleasures were for
people younger than he. It required youth and energy to see beauty
and romance in such things, and he hadn’t a trace of either left. His
day was over and he might as well die, really, for all the good he
was, apart from his money, to any one.

The reminiscences of Byington Briggs, Esq., of Skeff,

Briggs & Waterhouse, private legal advisers to the late J.
H. Osterman, as developed in a private conversation at
the Metropolitan Club in New York in December, 19—.
“You knew old Osterman, didn’t you? I was his confidential adviser
for the last eight years of his life, and a shrewder old hawk never
sailed the air. He was a curious combination of speculator, financier
and dreamer, with a high percentage of sharper thrown in for good
measure. You’d never imagine that he was charitably inclined, now
would you? It never occurred to me until about a year and a half
before his death. I have never been able to explain it except that as
a boy he had had a very hard time and in his old age resented
seeing his two stepsons, Kester and Rand Benda, getting ready to
make free use of his fortune once he was gone. And then I think he
had come to believe that his wife was merely using him to feather
her own nest. I wouldn’t want it mentioned to a soul as coming from
me, but three months before he died he had me draw up a will
leaving his entire estate of something like forty millions, not to her, as
the earlier will filed by her showed, but to the J. H. Osterman
Foundation, a corporation whose sole purpose was to administer his
fortune for the benefit of something like three hundred thousand
orphans incarcerated in institutions in America. And but for the
accident of his sudden death out there at Shell Cove two years ago,
he would have left it that way.
“According to the terms of the will that I drew up, Mrs. Osterman
and her two sons were to receive only the interest on certain bonds
that were to be placed in trust for them for their lifetime only; after
that the money was to revert to the fund. That would have netted
them between forty and fifty thousand a year among them—nothing
more. In the will I drew up he left $500,000 outright to that Gratiot
Home for Orphans up here at 68th Street, and he intended his big
country place at Shell Cove as the central unit in a chain of modern
local asylums for orphans that was to have belted America. The
income from the property managed by the foundation was to have
been devoted to this work exclusively, and the Gratiot institution was
to have been the New York branch of the system. His wife has
leased the Shell Cove place to the Gerbermanns this year, I see, and
a wonderful place it is too, solid marble throughout, a lake a mile
long, a big sunken garden, a wonderful glassed-in conservatory, and
as fine a view of the sea as you’ll find anywhere. Yet she never knew
until the very last hour of his life—the very last, for I was there—that
he planned to cut her off with only forty or fifty thousand a year. If we
weren’t all such close friends I wouldn’t think of mentioning it even
now, although I understand that Klippert, who was his agent in the
orphan project, has been telling the story. It was this way:
“You see, I was his lawyer, and had been ever since the K. B. & B.
control fight in 1906, and the old man liked me—I don’t know why
unless it was because I drew up the right sort of ‘waterproof
contracts,’ as he always called them. Anyway, I knew six or seven
years before he died that he wasn’t getting along so well with Mrs.
Osterman. She is still an attractive woman, with plenty of brain
power and taste, but I think he had concluded that she was using
him and that he wasn’t as happy as he thought he would be. For one
thing, as I gathered from one person and another, she was much too
devoted to those two boys by her first husband, and in the next place
I think he felt that she was letting that architect D’Eyraud lead her
about too much and spend too much of his money. You know it was
common rumor at the time that D’Eyraud and his friend Beseroe,
another man the old captain disliked, were behind her in all her
selections of pictures for the gallery she was bringing together up
there in the Fifth Avenue place. Osterman, of course, knowing
absolutely nothing about art, was completely out of it. He wouldn’t
have known a fine painting from a good lithograph, and I don’t think
he cared very much either. And yet it was a painting that was one of
the causes of some feeling between them, as I will show you. At that
time he looked mighty lonely and forlorn to me, as though he didn’t
have a friend in the world outside of those business associates and
employés of his. He stayed principally in that big town house, and
Mrs. Benda—I mean Mrs. Osterman—and her sons and their friends
found a good many excuses for staying out at Shell Cove. There
were always big doings out there. Still, she was clever enough to be
around him sometimes so as to make it appear, to him at least, that
she wasn’t neglecting him. As for him, he just pottered around up
there in that great house, showing his agents and employés, and the
fellows who buzzed about him to sell him things, the pictures she
was collecting—or, rather, D’Eyraud—and letting it appear that he
was having something to do with it. For he was a vain old soldier,
even if he did have one of the best business minds of his time. You’d
think largeness of vision in some things might break a man of that,
but it never does, apparently.
“Whenever I think of him I think of that big house, those heavily
carved and gilded rooms, the enormous eighty-thousand dollar
organ built into the reception-room, and those tall stained-glass
windows that gave the place the air of a church. Beseroe once told
me that if left to follow her own taste Mrs. Osterman would never
have built that type of house, but that Osterman wanted something
grand and had got his idea of grandeur from churches. So there was
nothing to do but build him a house with tall Gothic windows and a
pipe-organ, and trust to other features to make it homelike and
livable. But before they were through with it Mrs. Osterman and
D’Eyraud had decided that the best that could be done with it would
be to build something that later could be turned into an art gallery
and either sold or left as a memorial. But I think both D’Eyraud and
Mrs. Osterman were kidding the old man a little when they had that
self-playing attachment built in. It looked to me as though they
thought he was going to be alone a good part of the time and might
as well have something to amuse himself with. And he did amuse
himself with it, too. I recall going up there one day and finding him
alone, in so far as the family was concerned, but entirely surrounded
by twenty-five or more of those hard, slick and yet nervous (where
social form was concerned) western and southern business agents
and managers of his, present there to hold a conference. A luncheon
was about to be served in the grand dining-room adjoining the
reception-room, and there were all these fellows sitting about that big
room like a lot of blackbirds, and Osterman upon a raised dais at one
end of the room solemnly rendering The Bluebells of Scotland, one
of his favorites, from the self-player attachment! And when he
finished they all applauded!
“Well, what I wanted to tell you is this: One day while I was there,
some dealer dropped in with a small picture which for some reason
took his fancy. According to Beseroe, it wasn’t such a bad thing,
painted by a Swedish realist by the name of Dargson. It showed a
rather worn-out woman of about forty-three who had committed
suicide and was lying on a bed, one hand stretched out over the
edge and a glass or bottle from which she had taken the poison lying
on the floor beside her. Two young children and a man were
standing near, commiserating themselves on their loss, I presume. It
seemed to have a tremendous impression on Osterman for some
reason or other. I could never understand why—it was not so much
art as a comment on human suffering. Nevertheless, Osterman
wanted it, but I think he wanted Nadia to buy it for her collection and
so justify his opinion of it. But Nadia, according to Beseroe, was
interested only in certain pictures as illustrations of the different
schools and periods of art in different countries. And when the dealer
approached her with the thing, at Osterman’s suggestion, it was
immediately rejected by her. At once Osterman bought it for himself,
and to show that he was not very much concerned about her opinion
he hung it in his bedroom. Thereafter he began to be quarrelsome in
regard to the worthwhileness of the gallery idea as a whole and to
object to so much money being squandered in that direction. But to
this day no one seems to know just why he liked that particular
picture so much.
“What I personally know is that it was just about this time that
Osterman began to be interested in that fellow Klippert and his plan
for improving the condition of the orphan. He finally turned him over
to me with the request that I go into the idea thoroughly, not only in
regard to the work done by the Gratiot Home but by orphan asylums
in general in America. He told us that he wanted it all kept very quiet
until he was ready to act, that if anything was said he would refuse to
have anything further to do with it. That was a part of his plan to
outwit Mrs. Osterman, of course. He told us that he wanted some
scheme in connection with orphans that would be new and
progressive, better than anything now being done, something that
would do away with great barracks and crowd regulations and cheap
ugly uniforms and would introduce a system of education and home
life in cottages. I had no idea then that he was planning the immense
thing that was really in his mind, and neither did Klippert. He thought
he might be intending to furnish enough money to revive the Gratiot
Home as an experiment, and he urged me to use my influence to
this end if I had any. As it turned out, he wanted to establish an
interstate affair, as wide as the nation, of which the place at Shell
Cove was to be the centre or head—a kind of Eastern watering-
place or resort for orphans from all over America. It was a colossal
idea and would have taken all of his money and more.
“But since he wanted it I went into the idea thoroughly with this
fellow Klippert. He was very clever, that man, honest and thorough
and business-like and disinterested, in so far as I could see. I liked
him, and so did Osterman, only Osterman wanted him to keep out of
sight of his wife until he was ready to act. Klippert made a regular
business of his problem and went all over the United States studying
institutions of the kind. Finally he came back with figures on about
fifty or sixty and a plan which was the same as that outlined to me by
Osterman and which I incorporated in his will, and there it ended for
the time being. He didn’t want to sign it right away for some reason,
and there it lay in my safe until—well, let me tell you how it was.
One Saturday morning—it was a beautiful day and I was thinking
of going out to the club to play golf—I received a long distance call
from Osterman asking me to get hold of Klippert and another fellow
by the name of Moss and bring them out to Shell Cove, along with
the will for him to sign. He had made up his mind, he said, and I
have often wondered if he had a premonition of what was going to
happen.
“I remember so well how excited Klippert was when I got him on
the wire. He was just like a boy, that fellow, in his enthusiasm for the
scheme, and apparently not interested in anything except the welfare
of those orphans. We started for Shell Cove, and what do you think?
Just as we got there—I remember it all as though it had happened
yesterday. It was a bright, hot Saturday afternoon. There were some
big doings on the grounds, white-and-green and white-and-red
striped marque tents, and chairs and swings and tables everywhere.
Some of the smartest people were there, sitting or walking or
dancing on the balcony. And there was Osterman walking up and
down the south verandah near the main motor entrance, waiting for
us, I suppose. As we drove up he recognized us, for he waved his
hand, and then just as we were getting out and he was walking
towards us, I saw him reel and go down. It was just as though some
one had struck him with something. I realized that it must be
paralysis or a stroke of apoplexy and I chilled all over at the thought
of what it might mean. Klippert went up the steps four at a time, and
as we all ran down the verandah they carried him in and I
telephoned for a doctor. Klippert was very still and white. All we
could do was to stand around and wait and look at each other, for
Mrs. Osterman and her sons were there and were taking charge.
Finally word came out that Mr. Osterman was a little better and
wanted to see us, so up we went. He had been carried into an airy,
sunny room overlooking the sea and was lying in a big white
canopied bed looking as pale and weak as he would if he had been
ill for a month. He could scarcely speak and lay there and looked at
us for a time, his mouth open and a kind of tremor passing over his
lips from time to time. Then he seemed to gather a little strength and
whispered: ‘I want—I want—’ and then he stopped and rested,
unable to go on. The doctor arrived and gave him a little whisky, and
then he began again, trying so hard to speak and not quite making it.
At last he whispered: ‘I want—I want—that—that—paper.’ And then:
‘Klippert—and you—’ He stopped again, then added: ‘Get all these
others out of here—all but you three and the doctor.’
“The doctor urged Mrs. Osterman and her sons to leave, but I
could see that she didn’t like it. Even after she went out she kept
returning on one excuse and another, and she was there when he
died. When she was out of the room the first time I produced the will
and he nodded his approval. We called for a writing board, and they
brought one—a Ouija board, by the way. We lifted him up, but he
was too weak and fell back. When we finally got him up and spread
the will before him he tried to grasp the pen but he couldn’t close his
fingers. He shook his head and half whispered: The——the——boys
—th—the—boys.’ Klippert was all excited, but Osterman could do
nothing. Then his wife came into the room and asked: ‘What is it that
you are trying to make poor Johnnie sign? Don’t you think you had
better let it rest until he is stronger?’ She tried to pick up the paper
but I was too quick for her and lifted it to one side as though I hadn’t
noticed that she had reached for it. I could see that she was aware
that something was being done that neither we nor Osterman
wanted her to know about, and her eyes fairly snapped. Osterman
must have realized that things were becoming a little shaky for he
kept looking at first one and then another of us with a most unhappy
look. He motioned for the pen and will. Klippert put down the board
and I the paper, and he leaned forward and tried to grasp the pen.
When he found he couldn’t he actually groaned: ‘The—the—I—I—I
want to—to—do something—for—for—the—the—the—’ Then he fell
back, and the next moment was dead.
 “But I wish you could have seen Klippert. It wasn’t anything he
said or did, but just something that passed over his face, the shadow
of a great cause or idea dying, let us say. Something seemed to go
out from or die in him, just as old Osterman had died. He turned and
went out without a word. I would have gone too, only Mrs. Osterman
intercepted me.
“You might think that at such a moment she would have been too
wrought up to think of anything but her husband’s death, but she
wasn’t. Far from it. Instead, as her husband was lying there, and
right before the doctor, she came over to me and demanded to see
the paper. I was folding it up to put into my pocket when she flicked it
out of my hands. ‘I am sure you can have no objection to my seeing
this,’ she said icily, and when I protested she added: ‘I am sure that I
have a right to see my own husband’s will.’ I had only been
attempting to spare her feelings, but when I saw what her attitude
was I let it go at that and let her read it.
“I wish you could have seen her face! Her eyes narrowed and she
bent over the paper as though she were about to eat it. When she
fully comprehended what it was all about she fairly gasped and
shook—with rage, I think—though fear as to what might have
happened except for her husband’s weakness may have been a part
of it. She looked at him, at his dead body, the only glance he got
from her that day, I’m sure, then at me, and left the room. Since
there was nothing more to do, I went too.
“And that’s the reason Mrs. Osterman has never been friends with
me since, though she was genial enough before. But it was a close
shave for her, all the same, and don’t you think it wasn’t. Just an
ounce or two more of strength in that old codger’s system, and think
what would have been done with those millions. She wouldn’t have
got even a million of it all told. And those little ragamuffins would
have had it all. How’s that for a stroke of chance?”
 XIII
THE SHADOW

W HAT had given him his first hint that all might not be as well at
home as he imagined was the incident of the automobile. Up to
that time he had not had a troubled thought about her, not one. But
after—Well, it was a year and a half now and although suspicion still
lingered it was becoming weaker. But it had not been obliterated
even though he could not help being fond of Beryl, especially since
they had Tickles to look after between them. But anyhow, in spite of
all his dark thoughts and subtle efforts to put two and two together,
he had not been able to make anything of it. Perhaps he was being
unjust to her to go on brooding about it.... But how was it possible
that so many suspicious-looking things could happen in a given time,
and one never be able to get the straight of them?
The main thing that had hampered him was his work. He was
connected with the Tri-State Paper Company, at the City Order desk,
and as a faithful employé he was not supposed to leave during
working hours without permission, and it was not always easy to get
permission. It was easy to count the times he had been off—once to
go to the dentist, and two or three times to go home when Beryl was
ill. Yet it just happened that on that particular afternoon his superior,
Mr. Baggott, had suggested that he, in the place of Naigly who
always attended to such matters but was away at the time, should
run out to the Detts-Scanlon store and ask Mr. Pierce just what was
wrong with that last order that had been shipped. There was a mix-
up somewhere, and it had been impossible to get the thing straight
over the telephone.
Well, just as he was returning to the office, seated in one of those
comfortable cross seats of the Davenant Avenue line and looking at
the jumble of traffic out near Blakely Avenue, and just as the car was
nearing the entrance to Briscoe Park he saw a tan-and-chocolate-
colored automobile driven by a biggish man in a light tan overcoat
and cap swing into view, cross in front of the car, and enter the park.
It was all over in a flash. But just as the car swung near him who
should he see sitting beside the man but Beryl, or certainly a woman
who was enough like her to be her twin sister. He would have sworn
it was Beryl. And what was more, and worse, she was smiling up at
this man as though they were on the best of terms and had known
each other a long time! Of course he had only had a glimpse, and
might have been mistaken. Beryl had told him that morning that she
was going to spend the afternoon with her mother. She often did
that, sometimes leaving Tickles there while she did her mother’s
marketing. Or, she and her mother, or she and her sister Alice, if she
chanced to be there, would take the baby for a walk in the park. Of
course he might have been mistaken.
But that hat with the bunch of bright green grapes on the side....
And that green-and-white striped coat.... And that peculiar way in
which she always held her head when she was talking. Was it really
Beryl? If it wasn’t, why should he have had such a keen conviction
that it was?
Up to that time there never had been anything of a doubtful
character between them—that is, nothing except that business of the
Raskoffsky picture, which didn’t amount to much in itself. Anybody
might become interested in a great violinist and write him for his
photo, though even that couldn’t be proved against Beryl. It was
inscribed to Alice. But even if she had written him, that wasn’t a
patch compared to this last, her driving about in a car with a strange
man. Certainly that would justify him in any steps that he chose to
take, even to getting a divorce.
But what had he been able to prove so far? Nothing. He had tried
to find her that afternoon, first at their own house, then at her
mother’s, and then at Winton & Marko’s real estate office, where
Alice sometimes helped out, but he couldn’t find a trace of her. Still,
did that prove anything once and for all? She might have been to the
concert as she said, she and Alice. It must be dull to stay in the
house all day long, anyhow, and he couldn’t blame her for doing the
few things she did within their means. Often he tried to get in touch
with her of a morning or afternoon, and there was no answer, seeing
that she was over to her mother’s or out to market, as she said. And
up to the afternoon of the automobile it had never occurred to him
that there was anything queer about it. When he called up Beryl’s
mother she had said that Beryl and Alice had gone to a concert and
it wasn’t believable that Mrs. Dana would lie to him about anything.
Maybe the two of them were doing something they shouldn’t, or
maybe Alice was helping Beryl to do something she shouldn’t,
without their mother knowing anything about it. Alice was like that,
sly. It was quite certain that if there had been any correspondence
between Beryl and that man Raskoffsky, that time he had found the
picture inscribed to Alice, it had been Alice who had been the go-
between. Alice had probably allowed her name and address to be
used for Beryl’s pleasure—that is, if there was anything to it at all. It
wasn’t likely that Beryl would have attempted anything like that
without Alice’s help.
But just the same he had never been able to prove that they had
been in league, at that time or any other. If there was anything in it
they were too clever to let him catch them. The day he thought he
had seen her in the car he had first tried to get her by telephone and
then had gone to the office, since it was on his way, to get
permission to go home for a few minutes. But what had he gained by
it? By the time he got there, Beryl and her mother were already
there, having just walked over from Mrs. Dana’s home, according to
Beryl. And Beryl was not wearing the hat and coat he had seen in
the car, and that was what he wanted to find out. But between the
time he had called up her mother and the time he had managed to
get home she had had time enough to return and change her clothes
and go over to her mother’s if there was any reason why she should.
That was what had troubled him and caused him to doubt ever since.
She would have known by then that he had been trying to get her on
the telephone and would have had any answer ready for him. And
that may have been exactly what happened, assuming that she had
been in the car and gotten home ahead of him, and presuming her
mother had lied for her, which she would not do—not Mrs. Dana. For
when he had walked in, a little flushed and excited, Beryl had
exclaimed: “Whatever is the matter, Gil?” And then: “What a crazy
thing, to come hurrying home just to ask me about this! Of course I
haven’t been in any car. How ridiculous! Ask Mother. You wouldn’t
expect her to fib for me, would you?” And then to clinch the matter
she had added: “Alice and I left Tickles with her and went to the
concert after going into the park for a while. When we returned, Alice
stopped home so Mother could walk over here with me. What are
you so excited about.” And for the life of him, he had not been able
to say anything except that he had seen a woman going into Briscoe
Park in a tan-and-chocolate car, seated beside a big man who
looked like—well, he couldn’t say exactly whom he did look like. But
the woman beside him certainly looked like Beryl. And she had had
on a hat with green grapes on one side and a white-and-green
striped sports coat, just like the one she had. Taking all that into
consideration, what would any one think? But she had laughed it off,
and what was he to say? He certainly couldn’t accuse Mrs. Dana of
not knowing what she was talking about, or Beryl of lying, unless he
was sure of what he was saying. She was too strong-minded and too
strong-willed for that. She had only married him after a long period of
begging on his part; and she wasn’t any too anxious to live with him
now unless they could get along comfortably together.
Yet taken along with that Raskoffsky business of only a few
months before, and the incident of the Hotel Deming of only the day
before (but of which he had thought nothing until he had seen her in
the car), and the incident of the letters in the ashes, which followed
on the morning after he had dashed home that day, and then that
business of the closed car in Bergley Place, just three nights
afterwards—well, by George! when one put such things together—
It was very hard to put these things in the order of their effect on
him, though it was easy to put them in their actual order as to time.
The Hotel Deming incident had occurred only the day before the
automobile affair and taken alone, meant nothing, just a chance
encounter with her on the part of Naigly, who had chosen to speak of
it. But joined afterwards with the business of the partly burned letters
and after seeing her in that car or thinking he had—Well—After that,
naturally his mind had gone back to that Hotel Deming business, and
to the car, too. Naigly, who had been interested in Beryl before her
marriage (she had been Baggott’s stenographer), came into the
office about four—the day before he had seen Beryl, or thought he
had, in the car, and had said to him casually: “I saw your wife just
now, Stoddard.” “That so? Where?” “She was coming out of the
Deming ladies’ entrance as I passed just now.” Well, taken by itself,
there was nothing much in that, was there? There was an arcade of
shops which made the main entrance to the Deming, and it was easy
to go through that and come out of one of the other entrances. He
knew Beryl had done it before, so why should he have worried about
it then? Only, for some reason, when he came home that evening
Beryl didn’t mention that she had been downtown that day until he
asked her. “What were you doing about four to-day?” “Downtown,
shopping. Why? Did you see me? I went for Mother.” “Me? No. Who
do you know in the Deming?” “No one”—this without a trace of self-
consciousness, which was one of the things that made him doubt
whether there had been anything wrong. “Oh, yes; I remember now. I
walked through to look at the hats in Anna McCarty’s window, and
came out the ladies’ entrance. Why?” “Oh, nothing. Naigly said he
saw you, that’s all. You’re getting to be a regular gadabout these
days.” “Oh, what nonsense! Why shouldn’t I go through the Deming
Arcade? I would have stopped in to see you, only I know you don’t
like me to come bothering around there.”
And so he had dismissed it from his mind—until the incident of the
car.
And then the matter of the letters ... and Raskoffsky ...
Beryl was crazy about music, although she couldn’t play except a
little by ear. Her mother had been too poor to give her anything more
than a common school education, which was about all that he had
had. But she was crazy about the violin and anybody who could play
it, and when any of the great violinists came to town she always
managed to afford to go. Raskoffsky was a big blond Russian who
played wonderfully, so she said. She and Alice had gone to hear
him, and for weeks afterward they had raved about him. They had
even talked of writing to him, just to see if he would answer, but he
had frowned on such a proceeding because he didn’t want Beryl
writing to any man. What good would it do her? A man like that
wouldn’t bother about answering her letter, especially if all the
women were as crazy about him as the papers said. Yet later he had
found Raskoffsky’s picture in Beryl’s room, only it was inscribed to
Alice.... Still, Beryl might have put Alice up to it, might even have
sent her own picture under Alice’s name, just to see if he would
answer. They had talked of sending a picture. Besides, if Alice had
written and secured this picture, why wasn’t it in her rather than
Beryl’s possession. He had asked about that. Yet the one flaw in that
was that Alice wasn’t really good-looking enough to send her picture
and she knew it. Yet Beryl had sworn that she hadn’t written. And
Alice had insisted that it was she and not Beryl who had written. But
there was no way of proving that she hadn’t or that Beryl had.
Yet why all the secrecy? Neither of them had said anything more
about writing Raskoffsky after that first time. And it was only because
he had come across Raskoffsky’s picture in one of Beryl’s books that
he had come to know anything about it at all. “To my fair little
western admirer who likes my ‘Dance Macabre’ so much. The next
time I play in your city you must come and see me.” But Alice wasn’t
fair or good-looking. Beryl was. And it was Beryl and not Alice, who
had first raved over that dance; Alice didn’t care so much for music.
And wasn’t it Beryl, and not Alice, who had proposed writing him. Yet
it was Alice who had received the answer. How was that? Very likely
it was Beryl who had persuaded Alice to write for her, sending her
own instead of Alice’s picture, and getting Alice to receive
Raskoffsky’s picture for her when it came. Something in their manner
the day he had found the picture indicated as much. Alice had been
so quick to say: “Oh yes. I wrote him.” But Beryl had looked a little
queer when she caught him looking at her, had even flushed slightly,
although she had kept her indifferent manner. At that time the
incident of the car hadn’t occurred. But afterwards,—after he had
imagined he had seen Beryl in the car—it had occurred to him that
maybe it was Raskoffsky with whom she was with that day. He was
playing in Columbus, so the papers said, and he might have been
passing through the city. He was a large man too, as he now
recalled, by George! If only he could find a way to prove that!