BOOK REVIEW
The State of the Art in Undergraduate International Texts ROBERT D. LEY*
Bemidji State University
There are several possible approaches to the teaching of economics at the undergraduate level. It is possible to emphasize the role of institutions like the I M F and transnational corporations or to build the course around a series of current topics. Neither of these approaches was adopted in the three texts reviewed. Instead, the authors chose a theoretical perspective, viewing international economics as an application and extension of conventional intermediate theory. This approach offers some advantages and also presents some problems. To its credit, the theoretical approach makes the international course exceedingly useful as a way of reenforcing and expanding students' knowledge of conventional theory. Comparative advantage a la Heckscher-Ohlin, for example, provides excellent opportunities to expand and sharpen students' knowledge of production theory and the welfare benefits of voluntary exchange. It also provides amPle opportunities for additional practice in theoretical derivation. Unfortunately, however, the theoretical approach may also impose an undesirable structure on the course. The trade theory portion, in particular, almost necessarily begins with a more or less careful explanation of comparative advantage in terms of resource endowments. By the time this material has been laid out, other reasons for trade such as product cycles, product differentiation, and scale economies, get tacked on in a way that may make them appear as afterthoughts. This is most unfortunate in light of the fact that most of the world's trade is between similarly endowed nations. Another disadvantage of a theoretical approach is that it may require fairly extensive
74
background on the part of the student. Two of the three texts discussed, for example, utilize I S - - L M analysis in their balance of payments discussion. This effectively restricts access to this material to a small segment of the undergraduate community. Those who are troubled by the low level of popular discussion of international issues may wish that we were able to share these insights more widely. All three of the texts divide themselves more or less neatly into a micro (trade) portion and a macro (finance) portion. Lack of greater integration of this material no doubt reflects more on the limitations of the theory than on any shortcoming of the authors. At the same time, it is not a matter of indifference which one of the sections is presented first. It is important that students understand the causes and effects of trade flows before they approach balance of payments issues. One cannot properly evaluate alternative adjustment mechanisms and related policies until it has been decided whether international exchange is basically beneficial or merely a channel through which shocks are conveyed. Of the texts reviewed, Salvatore's is the only one to develop the trade material first. In general, it appears that the trade portions of the texts are more similar than the finance portions. This is largely the result of the transition that macroeconomic thinking is presently undergoing. As one example of the differences involved, Salvatore presents a separate chapter on the monetary approach to the balance of payments and uses it as a f r a m e w o r k to discuss g l o b a l i n f l a t i o n . Richardson also looks at inflation as a global problem, but emphasizes the direct effects of U.S. budget deficits on global demand as well as their influence on the world's money stock.
BOOK REVIEW In terms of their balances of payments material, therefore, all three texts appear to include the Keynesian cross, plus something else. What the something else consists of is likely to evolve until some new macroeconomic consensus emerges. In the meantime instructors have the option of selecting a text which reinforces some of their own views or one which offers students an alternative perception. International exchange is a standard topic in the economic development curriculum. While Richardson is apparently an exception, the converse does not appear true: relations between the rich and poor tend not to receive much attention in the texts reviewed. This is a bit surprising. The topic has certainly received a great deal of attention from international bodies during the past decade, and aspects of the N o r t h - S o u t h relationship, i.e., the international debt crisis, have become
*The author would like to thank L. E. Johnson for his assistance.
front page news. In this area, the international economics course may be missing an important opportunity to make a positive contribution to undergraduate learning. The relative lack of attention to development issues is probably a consequence of the theoretical approach adopted in the texts reviewed. It is p e r h a p s no accident that Richardson, who elaborates least on the theory, is able to devote the most attention to this material. The others, after a more careful elaboration of the standard models, have fairly well exhausted the time available in a one-term offering. This is not to say that the t h e o r e t i c a l , m o d e l building a p p r o a c h is wrong. One should, however, be aware of the costs that its adoption entails. In the end, the three texts appear quite similar. All present essentially the same body of theory and all appear reasonably faithful to the micro-trade and macro-finance dichotomy. As much as anything, they appear to differ in the rigor of their model building. In this regard, instructors appear to have a considerable range of choice.
75
BOOK REVIEW
International Economics Dominick Salvatore MacMillan Publishing Co., Inc., New York, 1983, xxvi, 560 pp. Reviewed by JOE A. BELL Southwest Missouri State University
This text follows the traditional structure: the first half is devoted to trade theory and related issues; and the second half to international monetary and financial theory. In terms of theoretical rigor, the text is somewhere in the middle of current offerings, with the more sophisticated constructs, i.e., trade indifference curves and the IS-LM derivation, relegated to chapter appendices. Classical trade theory is first presented in a straightforward fashion with only a brief reference to the labor theory of value. The next three chapters develop modern trade theory using Heckscher-Ohlin. While the appendices in this section would be formidable for students without a background in intermediate theory, to ignore them would force students to use theoretical constructs in a purely mechanical fashion. Moreover, the extensions of Heckscher-Ohlin are rather brief, but do show that there are other explanations of trade flows than factor endowments. The only difference from most texts in the treatment of tariffs is that general equilibrium precedes the partial equilibrium analysis. Discussed somewhat briefly in this section are quotas and other non-tariff barriers. A rather interesting appendix to Chapter 9 presents the recent history and an analysis of state trading. Customs Unions, developing countries, and international factor movements are the topics of the final three chapters in the trade section. The presentation of the theory and history of custom unions is fairly standard. However, the discussion of developing economies does not concern development p e r se; rather it focuses on the importance of trade in the development process. The explanation and application of the commodity, income, and single factoral terms of trade are particu-
larty useful examples of how the effects of trade might be measured. Finally, while the effects of multinationals on developing economies are mentioned, it would have been beneficial to include some information concerning the emergence of multinationals headquartered in developing countries. The discussion of finance and monetary theory begins with foreign exchange and balance of payments analysis. There are two advantages to this approach. First, payments analysis can be presented more completely if students first understand the basics of foreign exchange. Second, Salvatore's presentation of balance of payments statements includes the basic, official settlements, liquidity, and I M F balances, which are no longer relevant for the U.S., are for most countries. The next three chapters concern automatic adjustment mechanisms and balance of payments policies. This material is well developed. Obviously, to understand issues of discretionary policies, one must first comprehend the automatic forces operating within the economy. This is the basic structure underlying economic analysis, a point many writers forget. Adjustment under flexible exchange rates incorrectly implies that the Marshall-Lerner condition is necessary for stability. The presentation of the income adjustment mechanism under fixed exchange rates uses the basic Keynesian-Cross. Discretionary adjustment policies are discussed using ISLM analysis. This chapter's reliance on the IS-LM model will create an obstacle for many students. The final two theory chapters are strong. The first concerns the monetary approach to the balance of payments. While many texts include this topic, a separate chapter is preferable since the approach is fundamentally
76
BOOK REVIEW different from the Keynesian view. Also, to the text's favor, is a section on world inflation. The monetary approach is a good mechanism for explaining global inflation as a short-term problem under fixed exchange rates. The final chapter presents the debate over flexible and fixed rates. An entire chapter at the end of the text, devoted to this subject, allows more complete development of the arguments involved. In summary, topics in this text are deve-
loped in a logical order which provides students an implicit outline of the basic theory of international economics. One who generally prefers a theoretical presentation will find Salvatore's text one of the best available. However, those who wish to emphasize issues concerning developing economies might well prefer other texts in the field. Also, there is only a brief chapter devoted to Bretton Woods, and those who prefer to concentrate on international relations will find this text largely useless for their purpose.
77
BOOK REVIEW
International Economics James C. Ingram New York: John Wiley & Sons, Inc., 1983, 415 pp. Reviewed by
DANIEL R. FAIRCHILD College of St. Thomas
The author states that this text is accessible to readers with no more formal background in economics than a principles course. While other textbook authors have made similar claims, not all such claims can withstand the demanding test of an introductory class in international economics. In this case, however, the claim appears to be well-founded. The exposition employs analytical tools that are standard ~fare in any principles course. While indifference curve analysis is used in several chapters, a brief introduction to this methodology is included for the benefit of those who did not encounter it in their introductory course. Several topics are covered in a more sophisticated manner than normally found in an i n t r o d u c t o r y text. The t r e a t m e n t of the Heckscher-Ohlin theory and the determinants of the elasticity of demand for foreign exchange are examples of two such topics. While most authors put more difficult or detailed material in appendices to chapters, Ingram places it in the chapter itself and clearly marks the section as being more advanced. Skipping these advanced sections does not seem to compromise the continuity or the readability of the remainder of the material. It should be noted, particularly by those planning to eliminate the more advanced sections, that some introductory level readers may be annoyed upon missing the "warningmore advanced material" flag and finding themselves in the midst of an unassigned and difficult-to-comprehend section. On the other hand, including material of greater than average difficulty should challenge and satisfy students with more than a principles preparation. For example, the optional treatment of Heckscher-Ohlin using a two nation, two
factor, two good model and Edgeworth diagrams should be edifying to those with an intermediate theory preparation. There are several salient features to recommend this text. The "real" and financial aspects of international economics are given a balanced treatment, at least in terms of the numbers of pages devoted to each. There are subjects, however, that receive precious little attention. There is but one chapter devoted to multinational corporations and one to the trade of less developed countries. In addition, the discussion of trade patterns, forward exchange markets, hedging, speculation, arbitrage, and non-tariff trade barriers is very brief. The author has made a concerted effort to bridge the gap between theory and experience. Extensive discussion of historical episodes helps in this regard. This is particularly evident in the three chapters covering the history of the international monetary system since 1880. While this attention paid to historical episodes yields benefits, it also carries a cost. Part of that tradeoff seems to be the limited space given to the topics previously mentioned. Lastly, the expository style used by Professor Ingram is admirable. There are pertinent numerical examples and applications of theoretical concepts throughout. The writing style is lucid, highly readable and, at times, engaging. While one may prefer to see more extensive treatment of certain topics, this text does seem to be one that can be easily complemented with selected supplementary materials or a well-chosen readings book. It has numerous attributes and stands up well when compared to its competition in the field.
78
BOOK REVIEW
Understanding International Economics: Theory and Practice J. David Richardson Boston, Little, Brown and Co., 1980, xvii, 512 pp. Reviewed by DAN RICHARDS
Hamilton College
This text covers the standard material of trade and international finance, emphasizing common sense and application rather than theoretical rigor. Richardson's announced aim is a text that is comprehensible to students with only limited exposure to economic analysis, comparable to that provided by most introductory sequences. The product is a book that is both highly readable and teachable, though this is more true with respect to the section on trade than the financial section. However, these two sections are largely independent of one another. Either would provide a solid basis for a single quarter offering. The text has several strengths. As Richardson intends, the book is highly accessible, perhaps even to those without any prior coursework in econmics. The analysis is primarily verbal, accompanied by easy-tounderstand graphs. In addition, there are several examples of policy analysis, and great care is taken to explain why issues such as the sources of comparative advantage and the determinants of the exchange rate are more than just matters of academic curiosity. Some of the very best chapters deserve special mention. The two chapters on the gains from trade are notable, both for their clarity and their breadth. Richardson provides an even and thorough consideration of the arguments for and against free trade, and allows for the presence of such complicating factors as domestic distortions, optimal tariff possibilities, and foreign dumping. The same is true of his chapter on the sources of comparative advantage. He goes well beyond the factor endowments approach to include differences in tastes and technology, scale econ-
79
omies, and related life cycle explanations. In the macro section, the chapter on the linkages between national economies is also both clear and thorough, and leaves little doubt about the reality of economic interdependence. For the most part, this discussion is framed in terms of two large countries. Richardson also includes a brief analysis of inflation as a global phenomenon. His explanation emphasizes the impact of U.S. budgetary policies on global demand, both through fiscal effects and, indirectly, through increases in the world money stock. Throughout the text, the author pays considerable attention to relations between the developed and the developing countries. There are, for example, solid treatments of the Prebisch-Singer hypothesis, the Link proposal, the role of multinational corporations, and the debate over the New International Economic Order. Written well before the debt crisis, the description of the international banking system ably describes the financial pyramiding that, in the absence of official intervention, such a crisis could undo, and the impact this could have. A minor difficulty is that many of these discussions are relegated to special appendices. These are, however, fairly well integrated with the text. The book has two principal weaknesses. First, the macro section lacks a central organizing construct. What is needed is some sort of accounting framework and associated behavioral relations to put the numerous conclusions in proper perspective. The problem is, of course, that such a framework--such as the I S - L M m o d e l - - i s p r o b a b l y b e y o n d Richardson's targeted audience. But without some such structure, several conclusions tend
BOOK REVIEW
to become mere entries in a large catalogue of results. Thus, there is a chapter entitled, "Effects of Domestic Economic Activity on Exchange Rates and the Balance of Payments," followed by a chapter entitled, "Effects of the Balance of Payments and Exchange Rates on Domestic Economic Activity in One Country on Domestic Economic Activity in Others." The content of these chapters is reasonable, but the forces they describe are not easy to sort out at best and the lack of overall structure increases the difficulty. The second weakness is the book's failure to develop the analytical technique that underlies the results Richardson so ably describes. Admittedly, little is gained by simply presenting abstract models with no clear connection to reality. But I do think it is important that students learn something of the thought process modelling entails. In particular, students who either have taken or plan to take further economics courses should learn a bit about constructing representations of the real world and about isolating the key
80
assumptions in such constructions. Richardson's text is not well designed for this purpose. He captures the flavor of the standard results, but students get little practice in analyzing how those results are reached. This does not mean the book is simplistic: As noted, Richardson allows for a variety of complicating factors. Many, however, may regard the book as incomplete. In sum, this is a highly accessible international text, with a particularly good discussion of trade theory. It is less strong in its handling of the open-economy macro models and in its development of the fundamental skills of economic analysis. For these reasons, instructors teaching a course beyond the level of intermediate theory, or one emphasizing international finance, will probably not make it their first choice. But for those teaching a lower level course, or a course for non-majors, or any course where intuition and results are accorded primary importance, Richardson's text is a very good selection.
