Transcript Slide 1-2

Chapter 2
World Trad: An Overview
Learning
Goals
（二）World
Trade: An Overview
• 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
1
Slide 1-2
Chapter Organization:

Who Trades with Whom?

The Changing Pattern of World Trade

Do Old Rules Still Apply?

Summary
3
Slide 1-3
1.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 1-4
Figure 2-1 Total China Exports to Major
Partners, 2008
Austrilia
22.238
Taiwan, China
25.878
India
31.5
33.005
Russia
73.951
North Korea
ASEAN
114.142
Japan
116.134
Hong Kong, China
190.743
252.297
United States
292.878
EU
0
50
100
5
150
200
250
300
350
Slide 1-5
(1)Size Matters: The Gravity Model
percent of China trade with
EU
Figure 2-2 the sizes of EU, and the volume of their trade with China
0.30
Germany
0.25
0.20
0.15
Netherlands
U.K
France
Italy
0.10
0.05
0.00
0.00
0.05
0.10
percent of EU GDP
6
0.15
Slide 1-6
The volume of trade between any two countries can
be predicted by following form
Tij=A×Yi ×Yj/Dij
•
•
•
•
•
An equation such as (2-1) is
known as a gravity model
Tij the value of trade between
country i and country j
Yi country i’s GDP
Yj country j’s GDP
Dij the distance between the two
countries
7
(2-1)
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 1-7
A more general gravity model:
Tij=A×Yia ×Yjb/Dijc
(2-2)
• a, b, and c are chosen to fit the actual data
as closely as possible
8
Slide 1-8
(2) The Logic of the Gravity Model
• 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 $10 trillion
RETURN
9
Slide 1-9
TABLE2-1 Hypothetical World Spending Shares and GDP
Percentage Share of
World Spending
Country
A
B
C
D
GDP ($ trillion)
40
40
10
10
4
4
1
1
TABLE2-2 Values of Exports($ trillion)
To:
A
B
C
D
A
B
C
D
-1.6
0.4
0.4
1.6
-0.4
0.4
0.4
0.4
-0.1
0.4
0.4
0.1
-Slide 1-10
(3) Using the Gravity Model: Looking for Anomalies
 Take Netherlands as an example
• Transport costs
and geography
are important
in determining
the volume of
trade
11
Slide 1-11
(4) Impediments to Trade: Distance, Barriers and Borders
Figure 3-4 the allocation of labor
• All estimated
Wage rate gravity model show a
PF×MPLon
strong negative effect of distance
F
international
trade Figure2-3
1
1
w
PM×MPLM
• Borders also have a large negative
LF
1
1
L
L
F
effect on trade,
M why?
12
Slide 1-12
2.The Changing Pattern of World Trade
(1) Has the World Gotten Smaller?
(2) What Do We Trade?
(3) Multinational Corporations and
Outsourcing
13
Slide 1-13
(1) Has the World Gotten Smaller?
Modern transportation and
communications have abolished
distance.
Political forces can outweigh the
effects of technology.
14
small
big
Slide 1-14

Figure 2-5 The rise, fall, and rise of
international trade since 1830
Trade as a
percent of GDP
70
60
50
40
30
20
10
0
1830
1870
1910
Year
U.K.
15
1950
1995
U.S.
Slide 1-15
(2) What Do We Trade?
When countries trade, what do they trade?
Agricultural products
Mining goods oil
Manufactured products
Services
Bangalore
eg, India’s overseas call and help center
16
Slide 1-16
Figure 2-6 The composition of world trade, 2003
Mining ,
11%
Services,
20%
Agricultural
, 8%
Manufactur
es, 61%
17
Slide 1-17
Table 2-4 Manufactured goods as percent of merchandise
trade
U.K.
Exports
U.S.
Imports
Exports
Imports
1910
1910
75.4
24.5
47.5
40.7
2002
2002
82.6
80.4
82.1
77.8
Manufactures dominate both sides of both
countries trade
18
Slide 1-18
Figure 2-7 The changing composition of developing-country
percent of exports
exports (price scissors?)
80
70
60
50
40
30
20
10
0
Manufactures
Agricultural
1960
1970
1980
19
1990
2001
Slide 1-19
(3) Multinational Corporations and Outsourcing
Car Production.
Outsourcing：Corporations move part of their
operations out of their country.
(eg.Subsidiaries or Subcontractions.)
After world war Ⅱ, multinational corporations play
a positive role ——helps to increase the volume of
trade.
(Why? Transfer price, cusomes duty, better coordination…)
20
Slide 1-20
3. Do Old Rules Still Apply?
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.
21
Slide 1-21
22
Slide 1-22
4. Summary

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?)
23
Slide 1-23