2. The Volume of Trade and the Gravity Model

Question 1

Define the Volume of Trade

Answer 1

The volume of trade refers to total quantity of goods and services traded internationally. and is usually expressed in constant dollars or as a percentage of GDP.

Question 2

What are the most common measures of the Volume of Trade.

Answer 2

Exports as a percent of GDP (Exports / GDP) Index of Openness ([Exports +Imports]/GDP)

Question 3

Currently, what percent of world output is exported?

Answer 3

30%

Question 4

List the US’ current top five trading partners.

Answer 4

Question 5

Top five countries with largest volume of trade

Answer 5

Question 6

Describe North-North, North-South, and South-South volume of trade.

Answer 6

North-North trade is large, North -South trade is moderate (but growing), South-South trade is small.

Question 8

Explain the use ofthe Gravity Model.

Answer 8

The Gravity Model is a simple theory to explain the volume of bilateral trade between any two countries. It is useful for:

• Predicting the volume of bilateral trade between any two countries.
• Uncovering trade volume anomalies.
• Providing a baseline (control) against which to estimate the effects of other variables on trade.

Question 9

The gravity model explains why the size of an economy is directly related to the volume of imports and exports. Why is this the case?

Answer 9

• Larger economies produce more goods and services, so they have more to sell in the export market.
• Larger economies generate more income from the goods and services sold, so they are able to buy more imports.

Question 10

What other things besides size effect trade?

Answer 10

• Distance between markets influences transportation costs and therefore the cost of imports and exports. (distance my also influence personal contact and communication, which may influence trade.
• Cultural Affinity: If two countries have cultural ties, it is likely that they also have strong economic ties.
• Geography: ocean harbors and lack of mountain barriers make transportation and trade easier.
• Multinational Corporations: corporations spread across different nations import and export many goods between their divisions.
• Borders: crossing borders involves formalities that take time and perhaps monetary costs like tariffs.

Question 11

Write out the Gravity Model

Answer 11

Question 12

Estimates of the effect of distance from the gravity model predict that a 1% increase in the distance between countries is associated with a 1. _________ in the volume of trade of between 2._________ and 3.__________%.

Answer 12

1. decrease
2. 0.7%
3. 1%

Question 13

Has the effect of distance become smaller over time?

Answer 13

• Trade as a share of wold GDP has mostly grown during the past 150 years (except during war and recessions)
• This is due to improved technologies and policies (sails, railroads, power, airplanes, internet), and trade liberalization and trade agreements (WTO).
• However, we trade more regionally than before due to regional FTAs; communications technologies have improved more than transportation so that most “offshoring” is regional.
• Geographic pattern of Merchandise trade from 1997 differs greatly from 1965

Question 14

How do you find the amout of US Imports from France?

Answer 14

The amount of US imports from France (M) is equal to the Fraction of US Income spent on French Goods (S) * US national Income(Y).

M = S * Y

Question 15

How would you find the total bilateral Trade between US and France?

Answer 15

Total Bilateral Trade between US and France (T) = [the Fraction of US Income spent on French goods (Su) * the US National Income (Yu)] + [the Fraction of Frence Income spent on US goods (Sf) * the French National Income (Yf)]

T = (Su * Yu) + (Sf * Yf)

Question 16

Trade varies _________ (Inversely or directly) with distance between two countries.

Question 17

With regards to volume of trade, do boarders matter?

Answer 17