Topic 1: Introduction to International Trade, Gravity Models, Political Economy of Trade

Question 1

International trade is a large part of economic activity. What is the world average % of GDP that international trade is responsible for?

Answer 1

30%

Question 2

List some opportunities and challenges that a globalising world provides to nations and people in the world

Answer 2

• Flows of goods and services increase consumer choices and reduce prices
• Migration of people and jobs
• Financial flows (foreign direct investment, portfolio flows)
• Rising integration of world markets and the resulting disintegration of the production process
• Quicker transmission of crises
• Limits to policy space of individual countries
• Environmental and health challenges

Question 3

When was the first wave of globalisation?

Answer 3

1870-1914 - Industrial Revolution, opening up new resource sources in “regions of recent settlement”
- Large scale migration and foreign investments increased output

Question 4

Why did global trade suffer a sharp decline from 1914

Answer 4

Two world wars, and the Great Depression (1929-1939)

Question 5

List some example of anti-trade regimes:

Answer 5

• Bolshevik Revolution 1917 in Russia
• Fascism in Italy 1920s, Nazism in Germany 1936, Franco victory in Spanish Civil War 1936
• State-led approaches to economic development in Mexico under revolutionary regime and in Argentina, Brazil and Chile under authoritarian regimes

Question 6

What was the U.S. Smoot-Hawley tariff in 1930

Answer 6

The Smoot-Hawey tariff in 1930 was enacted to protect U.S. farmers from foreign competition by increasing tariffs on certain foreign goods. It was as high as 60%. It reduced output and caused global trade to contract

Question 7

Since the General Agreements on Tariffs and Trade in 1947 (GATT) to the first oil shock in 1973, world exports few how much per annum?

Answer 7

8.8% p.a.

Question 8

Both imports and exports have risen as a share of the U.S. economy, but ……. have risen more

Answer 8

Imports

Question 9

The 2008 trade collapse was more severe than during the Great Depression, but….

Answer 9

Recovery was much faster

Question 10

Criticisms of globalisation:

Answer 10

• Exploitation of cheap labour or even child labour in poor countries
• Job losses and lower wages in rich countries
• Environmental degradation
• Increased frequency of crises due to financial globalisation

Question 11

What Accounts for the Rise of a Globalised World Economy?

Answer 11

– Falling transportation costs
– Trade liberalisation has resulted in falling tariffs, thus
easing trade flows between countries
– Improvements in telecommunications and transportation
have led to a strong cross-fertilisation of cultures and
convergence of tastes
– Globalisation of production that has been associated with
the rapid rise in operations of MNCs
– Globalisation of labour markets in the form of outsourcing
of production to other parts of the world, where labour
costs are cheaper

Question 12

What accounts for the rise of a globalised world economy?

Answer 12

• Slicing-up the value chain: breaking the production process into many geographically separated steps
• The rise of intra-industry trade: trade in similar goods between countries

Question 13

When a buyer and seller engage in a voluntary transaction, both can be made ……. …

Answer 13

Better off

Question 14

How could a country that is the most (least) efficient producer of everything gain from trade?

Answer 14

• Countries use finite resources to produce what they are most productive at (compare to their other production choices), then trade those products for goods and services that they want to consume
• Countries can specialise in production, while consuming many goods and services through trade

Question 15

Trade benefits countries by allowing them to export goods made with relatively abundant resources and import goods made with relatively …… resources

Answer 15

Scarce

Question 16

When countries specialise, they may be more efficient due to …..

Answer 16

Larger-scale production. Economies of scale

Question 17

Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country:

Answer 17

• International trade can harm the owners of resources that are used relatively intensively in industries that compete with imports.
• Trade may therefore affect the distribution of income within a country

Question 18

Policy makers affect the amount of trade through:
- Tariffs: a tax on imports or exports
- Quotas: a quantity restriction on imports or exports
- Export subsidies: a payment to producers that export
- Other regulations: e.g., product specifications) that exclude foreign products from the market, but still allow domestic products

Question 19

Reasons for patterns of trade: Who trades with who?

Answer 19

Differences in climate can explain why Brazil exports coffee and Australia exports iron ore. However, there also reasons like:
- Labour productivity
- Relative supplies of capital, labour and land and their use in the production of different goods and services

Question 20

Most around ….% of the volume of trade today is in …….. products such as automobiles, computers and clothing

Answer 20

57% Manufactured

Question 21

……. such as shipping, insurance, legal fees, and spending by tourists account for about …% of the volume of trade

Answer 21

Services 24%

Question 22

…… products (examples: petroleum, coal and copper) remain an important part of world trade at ….%

Answer 22

Mineral 12%

Question 23

…….. products are a relatively small part of trade at …%

Answer 23

Agricultural 8%

Question 24

Service outsourcing (or offshoring)

Answer 24

Occurs when a firm that provides services moves its operations to a foreign location
- service outsourcing can occur for services that can be transmitted electronically.
A firm may move its customers services centres whose telephone calls can be transmitted electronically to a foreign location.
Other services may not lend themselves to being performed remotely
Service is outsourcing is currently not a significant part of trade
- Most jobs (about 60%) need to be done close to the customer, making them non tradable.

Question 25

3 of the top 10 trading partners with the U.S. in 2008 were also the 3 largest European economies: Germany, U.K., and France. Why does the U.S. trade most with these European countries and not other European countries?

Answer 25

• These countries have the largest Gross Domestic Product (GDP), the value of goods and services produced in an economy, in Europe.
• Each European country’s share of U.S. trade with Europe is roughly equal to its share of European GDP

Question 26

Size Matters: the gravity model
The size of an economy is directly related to the volume of imports and exports.

Answer 26

• 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.
  Trade between any two countries is larger, the larger is the either country.

Question 27

What else, besides size, matters for trade?

Answer 27

1. Distance between markets influences
   transportation costs and therefore the cost of
   imports and exports
   – Distance may also influence personal contact and
   communication, which may influence trade
2. Cultural affinity: if two countries have cultural ties,
   it is likely that they also have strong economic tie
3. Geography: ocean harbors and a lack of mountain barriers
   make transportation and trade easier
4. Multinational corporations: corporations spread across
   different nations import and export many goods between
   their divisions
5. Borders: crossing borders involves formalities that take time
   and perhaps monetary costs like tariffs
   – These implicit and explicit costs reduce trade
   – The existence of borders may also indicate the existence
   of different languages or different currencies, either of
   which may impede trade more

Question 28

Estimates of the effect of distance from the gravity model predict
that a 1 percent increase in the distance between countries is
associated with a decrease in the volume of trade of … percent to
… percent

Answer 28

0.7-1%

Question 29

The United States signed a free trade agreement with Mexico and
Canada in 1994, the North American Free Trade Agreement (NAFT
A), which was replaced in …. with a slightly modified agreement,
the U.S.-Mexico-Canada agreement (….)

Answer 29

2020 - USMCA

Question 30

Canada’s economy is roughly the same size as Spain’s (around
.. percent of EU GDP) but Canada trades as much with the
United States as does all of Europe

Answer 30

10%

Question 31

Data shows that there is much more trade between pairs of
Canadian provinces than between Canadian provinces and
U.S. states, even when ……………….. ………….. …………….

Answer 31

holding distance constant

Question 32

World trade to gdp ratio for 2022 was ….%

Answer 32

62.5%

Question 33

International Trade has roughly …….. in importance compared with the economy as a whole

Answer 33

tripled

Question 34

Why does GDP matter in the gravity model?

Answer 34

There is a strong empirical relationship between the size of a country’s economy and the volume of both its imports and its exports.

Question 35

What does GDP have to do with trade? How does distance affect the value of trade?

Answer 35

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.
- Represented by Tij = A Yi Yj/Dij,

Question 36

Why does the gravity model work?

Answer 36

Why does the gravity model work? Broadly speaking, large economies tend to spend large amounts on imports because they have large incomes. They also 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

Question 37

How is the gravity model useful?

Answer 37

Indeed, when trade between two countries is either much more or much less than a gravity model predicts, economists search for the explanation.

Question 38

What are the three impediments to trade?

Answer 38

1. Distance
2. Barriers
3. Borders

Question 39

What is the NAFTA?

Answer 39

North American Free Trade Agreement, or NAFTA, which ensures that most goods shipped among the three countries are not subject to tariffs or other barriers to international trade.

Question 40

What is the composition of world trade?

Answer 40

1. Manufactures - 54.78%
2. Services - 19.77%
3. Fuels and Mining - 18.48%
4. Agricultural - 7.02%

Question 41

How is today’s trade different from trade of the past?

Answer 41

The current picture, in which manufactured goods dominate world trade, is relatively new. In the past, primary products—agricultural and mining goods—played a much more important role in world trade.

Question 42

What did britain import and export in the early 20th century?

Answer 42

In the early 20th century Britain, while it overwhelmingly exported manufactured goods (manu- factures), mainly imported primary products.

Question 43

What is trade like today for Britain?

Answer 43

Today manufactured goods dominate both sides of its trade.

Question 44

How has the U.S. changed over time?

Answer 44

Primary products were more important than manufactured goods on both sides to one in which manufactured goods dominate on both sides.

Question 45

What is a developing country?

Answer 45

The terms third world and developing countries are applied to the world’s poorer nations, many of which were European colonies before World War II.

Question 46

How have developing countries changed over time? China?

Answer 46

As recently as the 1970s, these countries mainly exported primary products. Since then, however, they have moved rapidly into exports of manufactured goods. Figure 2-6 shows the shares of agricul- tural products and manufactured goods in developing-country exports since 1960. There has been an almost complete reversal of relative importance. For example, more than 90 percent of the exports of China, the largest developing economy and a rapidly growing force in world trade, consists of manufactured goods.

Question 47

What is service outsourcing?

Answer 47

When a service previously done within a country is shifted to a foreign location, the change is known as service offshoring (sometimes known as service outsourcing).

Question 48

Gross Domestic Product (GDP)

Answer 48

measures the total value of all goods and services produced in an economy

Question 49

The world got ……… between 1840 and 1914, but it got ………
again for much of the 20th century.

Answer 49

smaller/bigger