Lecture 1

Question 1

how might Governments affect the amount of trade through import
tariffs and other policies (5 bulletpoints)

Answer 1

• What are the welfare costs and benefits of these policies?
• If a government must restrict trade, which policy should it
  use and how much should it restrict trade?
• If a government restricts trade, what are the costs if foreign
  governments respond likewise?
• Trade policies are often chosen to cater to special interest
  groups, rather than to maximize national welfare.
• Governments tend to adopt tariffs, then negotiate them
  down in exchange for reduction in trade barriers of other
  countries.

Question 2

What is the gravity model?

Answer 2

a model that focusses on determining actual trade by just looking at size and distance of a country (GDP sixze) expressed like

Tij = A x Yi x Yj/Dij x εij

where
-Tij is the value of trade between country i and country j
-A is a constant
-Yithe GDP of country i
-Yjis the GDP of country j
-Dij is the distance between country i and country j
-c is the elasticity of trade with respect to distance
-εij is unexplained variation

Question 3

what do we do to the gravity model when dealing with empirical tests?

Answer 3

we use the same equation as the normal gravity model but take the natural log of each variable

Question 4

why does the gravity model work despite being so simple?

Answer 4

Generally, countries with higher GDPs have greater imports and exports allowing trade to naturally occur since more goods mean more trades - it also helps us understand anomalies in trade

Question 5

what does the gravity model not take into account?

Answer 5

cultural affinity. e.g ireland trade more with US as it has a larger native population their than it does in Netherlands despite gravity model shifting them together as ideal partners

Geography - large port harbors e.g Rotterdam and antwerp or large mountain ranges

Borders - may sometimes be tolls and tariffs or it could be really easy and countries trade more despite its smaller gdps

government trade agreements like the USMCA free trade agreement, smaller GDP in comparison but so close to US —–and political alignment