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 1-4

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 1-5

Figure 2-1 Total China Exports to Major Partners, 2008

292.878

252.297

190.743

116.134

114.142

73.951

33.005

31.5

25.878

22.238

0 50 100 150 200 250 300 350

EU

United States

Hong Kong, China

Japan

ASEAN

North Korea

Russia

India

Taiwan, China

Austrilia

5

Slide 1-6

(1)Size Matters: The Gravity Model

6

Germany

FranceI tal yNetherl andsU. K

0. 00

0. 05

0. 10

0. 15

0. 20

0. 25

0. 30

0. 00 0. 05 0. 10 0. 15percent of EU GDP

per

cent of Chin

a t

rad

e with

EU

Figure 2-2 the sizes of EU, and the volume of their trade with China

Slide 1-7

7

Tij=A×Yi ×Yj/Dij (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

• 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

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

Tij=A×Yia ×Yj

b/Dijc (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

RETURN

• 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

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ABCD

--1.60.40.4

1.6--

0.40.4

0.40.4--

0.1

0.40.40.1--

To: A B C D

TABLE2-2 Values of Exports($ trillion)

ABCD

40401010

4411

Country

TABLE2-1 Hypothetical World Spending Shares and GDP

Percentage Share of World Spending

GDP ($ trillion)

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(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

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(4) Impediments to Trade: Distance, Barriers and Borders

LF

1w1

Wage rate

PF×MPLF

PM×MPLM

LM1 LF

1

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 1-13

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 1-14

(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

Figure 2-5 The rise, fall, and rise ofinternational trade since 1830

0

10

20

30

40

50

60

70

1830 1870 1910 1950 1995Year

Tra

de

as a

per

cen

t of

GD

P

U.K. U.S.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 Bangaloreeg, India’s overseas call and help center

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Figure 2-6 The composition of world trade, 2003

Mining ,11%

Agricultural, 8%

Manufactures, 61%

Services,20%

17

Slide 1-18

Table 2-4 Manufactured goods as percent of merchandise trade

1910

2002

75.4

82.6

24.5

80.4

47.5

82.1

40.7

77.8

Exports Imports

Exports Imports

U.K. U.S.

18

Manufactures dominate both sides of both

countries trade

1910

2002

Slide 1-19

Figure 2-7 The changing composition of developing-country

exports (price scissors?)

01020304050607080

1960 1970 1980 1990 2001

percent of exports

Manufactures

Agricultural

19

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(3) Multinational Corporations and Outsourcing

20

After world war , multinational corporations play Ⅱa 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.)

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3. 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.

Slide 1-222

2

Slide 1-23

4. 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?)