chapter 2 - world trade: an overview

Question 1

what is the gravity theory of trade?

Answer 1

a theory that states 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.

Question 2

what is the gravity theory of trade equation?

Answer 2

T ij = A * Y a i * Y b j / D c ij . , A is a constant , Yai is country one GDpP and Ybj is country two GDP and D cij is the distance between the countries

Question 3

why does the gravity theory of trade work?

Answer 3

large economies have larger incomes so spend more imports, they also produce a large range of products which attracts spending from abroad, so other things equal, the trade between two countries between any two countries is larger.

Question 4

how can you use the gravity theory of trade to find anomolies?

Answer 4

you plug the values of the GDPs and the distance between the countries then if the actual level of trade does not fit the trend. economists can look for reasons why

Question 5

what is the effect that borders have on trade?

Answer 5

there is a large negative effect borders have on trade and even in regions where there is minimal barriers to trade like in the free trade agreements of NAFTA between canada and USA, there is significantly greater trade in two citys within same country then two equally distanced citys in different countries

Question 6

what is vertical disintergration and what is its effect on world trade?

Answer 6

there has been a rise in world trade due to vertical disintergration. vertical disintergration is when Before a product reaches the hands of consumers, it often goes through many production stages in different countries.

Question 7

what product is mostly traded in todays world?

Answer 7

manufactured goods

Question 8

what primary resource is traded the most in todays world?

Answer 8

oil