Chapter 2 World Trad: An Overview

Slide 1-2 （二） World Trade: An Overview 1 Learning Goals Describe how the value of trade between any two countries depends on the size of these countries and explain the reasons for the relationship Discuss how distance and borders reduce the trade Describe how the share of international production that is traded has fluctuated over time and why there have been two ages of globalization Explain how the mix of goods and services that are traded has changed over time

Slide 1-3 Chapter Organization: Who Trades with Whom? The Changing Pattern of World Trade Do Old Rules Still Apply? Summary 3

Slide Who Trades with Whom? Size Matters: The Gravity Model The Logic of the Gravity Model Using the Gravity Model: Looking for Anomalies Impediments to Trade: Distance, Barriers and Borders 4

Slide 1-5 Figure 2-1 Total China Exports to Major Partners,

Slide 1-6 (1) Size Matters: The Gravity Model 6 Figure 2-2 the sizes of EU, and the volume of their trade with China

Slide T ij =A×Y i ×Y j /D ij (2-1) The volume of trade between any two countries can be predicted by following form An equation such as (2-1) is known as a gravity model T ij the value of trade between country i and country j Y i country i’s GDP Y j country j’s GDP D ij the distance between the two countries Other things equal, the value of trade between any two countries is proportional to the product of the two countries’ GDP, and diminishes with the distance between the two countries.

Slide 1-8 T ij =A×Y i a ×Y j b /D ij c (2-2) A more general gravity model: a, b, and c are chosen to fit the actual data as closely as possible 8

Slide 1-9 (2) The Logic of the Gravity Model 9 RETU RN Suppose: Everyone in the world spends his or her income in the same proportions Create an imaginary world consisting of four countries: A, B, C, and D We assume: A and B are big economies, 40% C and D are small economies, 10% total world spending is $10 trillion

Slide 1-10 ABCDABCD To: A B C D TABLE2-2 Values of Exports($ trillion) ABCDABCD Country TABLE2-1 Hypothetical World Spending Shares and GDP Percentage Share of World Spending GDP ($ trillion)

Slide 1-11 (3) Using the Gravity Model: Looking for Anomalies  Take Netherlands as an example 11 Transport costs and geography are important in determining the volume of trade

Slide 1-12 (4) Impediments to Trade: Distance, Barriers and Borders LFLF 1 w1w1 Wage rate P F × MPL F P M × MPL M LM1LM1 LF1LF1 Figure 3-4 the allocation of labor 12 All estimated gravity model show a strong negative effect of distance on international trade Figure2-3 Borders also have a large negative effect on trade, why?

Slide The Changing Pattern of World Trade (1) Has the World Gotten Smaller? (2) What Do We Trade? (3) Multinational Corporations and Outsourcing 13

Slide 1-14 (1) Has the World Gotten Smaller? 14 Modern transportation and communications have abolished distance. Political forces can outweigh the effects of technology. big small

Slide 1-15  15

Slide 1-16 (2) What Do We Trade? When countries trade, what do they trade? 16 Agricultural products Mining goods oil Manufactured products Services Bangalore eg, India’s overseas call and help center

Slide 1-17 Figure 2-6 The composition of world trade,

Slide 1-18 Table 2-4 Manufactured goods as percent of merchandise trade Exports Imports U.K.U.S. 18 Manufactures dominate both sides of both countries trade

Slide 1-19 Figure 2-7 The changing composition of developing-country exports (price scissors?) Manufactures Agricultural 19

Slide 1-20 (3) Multinational Corporations and Outsourcing 20 After world war Ⅱ, multinational corporations play a positive role ——helps to increase the volume of trade. (Why? Transfer price, cusomes duty, better coordination…) Car Production. Outsourcing ： Corporations move part of their operations out of their country. (eg.Subsidiaries or Subcontractions.)

Slide Do Old Rules Still Apply? 21 The answer is a resounding yes. Even though much about international trade has changed, the fundamental principal discovered by economists at the dawn of a global economy still apply.

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Slide Summary 23  The gravity model relates the trade between any two countries to the sizes of their economies. Using the gravity model also reveals the strong effects of distance and international borders in discouraging trade  International Trade is at record levels relative to the size of the world economy. However, impedents existed (protectionism, war...)  Manufactured goods dominate modern trade today. (from trade in primary products to services)  Develping Countries’ shifting from exporting primary products to manufactured goods. (emerging markets?)