Ch. 2: Patterns in International trade Flashcards
How many percentages of the goods produced in the world in 2015, worth 74 trillion was sold abroad?
30%
Which model can help analyze who trades with whom?
The gravity model. It is showing the empirical relationship and helps to make sense of the value of trade between any pair of countries. Also, puts light on the struggles that keeps limiting international trade.
Which 5 countries were the biggest trading partners of the US in 2015?
China, Canada, Mexico, Japan & Germany.
Why does the US, according to the gravity model, trade more heavily with Germany, UK and France compared to other EU countries?
Because they are the largest EU economies Highest GDP
There is a strong empirical relationship between the size of a country´s economy and the volume of its IM and EX.
How does the equation of the gravity model look like?
T_ij=A·Y_i·Y_j/D_ij
A=Contant
T_ij=The value of trade between country i and country j
Y_i=GDP of country i
D_ij=Distance between two countries
That is, the value of trade between any two countries is proportional, other things equal to the product of the two countries’ GDPs and diminishes with the distance between the two countries
Why does the gravity model work?
- Because large economies tend to spend large amounts on IM because they have large incomes.
- They tend to attract large shares of other countries spending because they produce a wide range of products.
So, other things equal, the trade between any two economies is larger, the larger is either economy.
“So, other things equal, the trade between any two economies is larger, the larger is either economy” - Are “other things” equal?
No! Countries spend much of their income at home. The US and EU each account for 25% of the world GDP, but each attracts only 2% of the other countries spending.
Anomalies in the gravity model: Why does the US trade more than expected with the Netherland, Belgium, and Ireland?
o Ireland: Cultural: Same language and many US immigrants are Irish.
o Netherlands + Belgium: Geography and transport costs: Both countries are in the Rhine, which is an import river for trading.
What does the gravity model say about distance between countries?
- US trade more with Canada and Mexico because they are neighbors.
- All gravity models show a strong negative effect of distance on international trade: 1% increase in distance = Fall of 0,7-1% in trade between those countries. It is due to transport costs. Also, it is because countries with personal contact tend to trade more, which is not the case when they are far away from each other.
Besides distance, what is another reason for the US trading heavily with Canada and Mexico?
The trade agreement “NAFTA”, which ensures that goods are traded without tariffs.
Do no trade barriers mean that national borders are irrelevant?
• They rarely make national borders irrelevant. Even with all barriers down, there are much more trade between regions of the same country than between different countries.
o Canada and the US is an example. Here they are part of a trade agreement, speak the same language and still Canada has more trade between provinces than between Canada and US.
Has the world gotten smaller?
- Yes! It is both due to the internet and jet transport.
* Politically, the world became smaller between 1840 and 1914, but then bigger again in the 20th century.
How did the world trade grow until the WW1 and how did it grow after? What was the causes of the growth?
World trade grew up to the decades of the World War 1 and then fell a lot. It didn’t return to pre-World-War 1 levels until the early 1970.
• Much of this rise in the value of world trade reflects the so-called “vertical disintegration” of production
What do we trade?
- Mainly manufactured goods ex. automobiles, computers, and clothing.
- Agriculture is expected to play a more important role in the future.
What change happened to the exporting goods of China between 1960 and 2001?
Many third world or developing counties went from exporting primary goods to exporting manufactured goods ex. China. 90% of China´s export is manufactured goods today.
