Intro

Question 1

5 facts about world trade

Answer 1

Since 1960 trade is a large part of the world’s economy

Almost 60% of trade is manufactured goods

Fragmented production (international supply chains) boosts trade

90% of trade by sea

Tech reduces costs e.g containerisation

Question 2

A) What drove trade before globalisation
B) First wave of globalism marked by
C)2nd wave caused by…

Answer 2

A) Colonialisation

B) Rise and fall (due to war) of intra-EU trade

C) Technological advancement (fall in transport/communication costs)

Question 3

Asia share of world export

Answer 3

36%

Question 4

Total trade flows proportion that occur between

Developed countries

Developing countries

Developing and developed countries

Answer 4

> 50%

15%

30%

Question 5

Gravity equation for bilateral trade flows (between country I and J

Answer 5

Tij = α + β(GDPi x GDPj) + yDij + εij

Tij : bilateral trade flows between country I and j
Dij : distance between countries

Question 6

When is there gravity:

Answer 6

β^ > 0 (i.e trade between the 2 countries increases with GDP)
Y^ < 0 (trade decreases with distance)

Question 7

Border effect

Answer 7

Trade is much higher WITHIN countries than across country borders

Question 8

4 reasons for border effect (borders reduce trade)

Answer 8

Tariffs
Administration (documentation), customs & regulatory compliance
Currency exchange required
Cultural barriers

Question 9

Do small countries trade more (share of GNP) or less than large countries?

Answer 9

More

Question 10

No trade model:

If trade is possible, why may countries not trade? (4)

Answer 10

Identical tech and taste
Same relative factor endowments
Constant RTS
No distortions

Question 11

Why do countries trade? (3)

Answer 11

Differences in tech (Ricardian)
Diff in factor endowments (HO)
Imperfect competition

Question 12

Ricardian’s Comparative advantage

Answer 12

Country exports products in which its labour productivity (relative to other products) is higher than in other countries

Question 13

Heckscher-Ohlin

Answer 13

Factor endowments - countries should export products that are intensive in the factor that is in abundance within their country

E.g a lot of labour - make labour made products

Question 14

Leontief paradox contrasted Hechkscher - how?

Answer 14

K/L ratio embodied in US imports exceed the one in exports.

(Contrasts Heckscher model if we believe US are more capital intensive than trading partners, since if they are more k intensive they should export more than import capital goods)

Question 15

New trade theory based on (3)

Answer 15

EOS
Product differentiation
Consumer taste of variety

(Factor endowment no longer matters)

Question 16

Go back to the 3 possible causes of trade

Answer 16

Differences in tech (Ricardian comparative adv since affects labour productivity.)

Differences in factor endowment (Heckscher)

Imperfect competition (since much trade involves importing and exporting similar products, which imperfect comp explains)