11. Trade, spillovers & complexity Flashcards
What are the different models of trade?
Classical Models
Trade is based on the relative differences between countries.
These differences can be technological capabilities (Ricardian model) or based on natural endowments/factor supplies (Heckscher-Ohlin model). Basically, you do not need to be the best in anything to take advantage of trade; what counts is if you can produce something more efficiently than others.
Krugman Model / New Trade Theory
Based on product differentiation and economies of scale
As markets become more fragmented into niche products (consumers love variety), producers struggle to keep up the volumes that would allow them to cover their product development costs. International trade in that sense allows for a larger marketplace, meaning each firm can operate at a larger scale and therefore more firms can survive
Gravity Model of Trade
An empirical model used for research on trade flows that expresses exports from one country to another as a function of the countries’ (i) GDPs, (ii) Bilateral trade costs, (iii) Relative prices.
Basically says that the share of low- and middle-income countries in global trade should increase in rough proportion to their share of global income.
BUT after 2000, Southern trade has grown faster than Souther GDP -> not enough evidence to why this is happening
There is no model yet that explains all the things that exist within trade patterns.
What are the shifting trends in global trade?
Hanson (2012)
1950s-1980s: trade was dominated by flows between high-income countries (North-North trade) due to the fact that they accounted for most of global GDP and because developing countries had high import barriers
Dominating models of trade were based on product differentiation and economies of scale
Trend 1: Rise in North-South trade
(mainly due to the opening up of China and India, and later other middle-income countries like Brazil, Korea, Mexico, Russia)
This has sparked new interest in classical models -> Ricardian model has been adjusted to emphasize differences in national industrial capabilities as a driver of trade. A lot of developing countries export goods at an early stage in production and produce a narrow range of goods. But it is believed that they will move up the product ladder in terms of capital intensity and quality as their incomes rise.
Specialization in primary commodities was seen as a pathway to economic growth for many low-income countries. !!!
Trend 2: Rise in South-South Trade
due to urbanization, industrialization in China and India that needed raw materials from other developing countries
also due to the lengthening of GVCs and deepening of global production networks
What are the sources of gains from trade?
- Love of varieties -> gains associated with intra-industry trade (the New Trade Theory)
- Allocative efficiency gains associated with shifting labor and capital out of small less productive firms into larger, more productive firms
As production is concentrated towards better-performing firms, the overall efficiency of the industry improves. Globalization then raises the average efficiency within an industry. - Productive efficiency gains associated with trade-induced innovation
Trade integration encourages firms to make necessary investments in R&D & Innovation that in turn raise productivity
To what extent does specialization matter in determining the trade patterns of a country?
Hanson (2012)
The classic model of specialization is the Ricardian one -> countries should take advantage of their relative differences, and therefore specialize in what they’re good at producing
With the rise in South-North trade, this model has been adjusted to say that at different stages of development, countries produce and specialize in different things. They start by producing a narrow range of products and then they move up the product ladder to produce more sophisticated products. For example, China started by producing apparel and footwear and then moved into electronics.
Hausmann et al (2007)
Specializing in some products will bring higher growth than specializing in others. Everything else being the same, an economy is better off producing goods that richer countries export (developing countries then should diversify into more sophisticated products to raise their incomes)
Specialization patterns according to the traditional view are a result of a country’s natural endowments: human labor, capital, natural resources, quality of its institutions.
However, other scholars, show that specialization is also a result of “cost discovery” -> When an entrepreneur tries to produce a new product for the first time, they face a lot of uncertainty and are exploring the underlying cost structure of the economy. In the process, they create a lot of knowledge spillovers (positive externalities) for other entrepreneurs to enter that market.
What are PRODY & EXPY?
Hausmann et al (2007)
PRODY measures how sophisticated a product is;
expressed as the ratio of the export share of a product in a country to the sum of the export shares of that product in all countries
EXPY measures the sophistication of a country’s total exports.
It is the sum of the export share of each product weighted by that
product’s PRODY. High is better
!!! Countries that export goods associated with higher productivity levels
grow more rapidly. To leapfrog and grow faster a country needs to diversify into
and scale up at least some sophisticated (higher PRODY) products -> increase economic complexity
What is the relationship between trade and inequality?
Generally, results indicate that trade contribute to rising within-industry inequality as well as rising inequality in countries at all income levels.
Globalization was expected to help the less skilled (who are presumed to be the locally relatively abundant factor in developing countries), the evidence showed that they are generally not better off (at least not relative to workers with higher skill or education levels).
