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Chapter 2 - Overview of World Trade

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Chapter 2 - Overview of World Trade

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teeandrea71
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Chapter 2- Overview of world trade

Quick quiz:
What country was the world's largest exporter of goods in 2022?
- China 3.59 trillion

What country was the world's largest exporter of goods in 2016?


- China 2.01 trillion

Who trades with whom?


- More than 30% of world output is sold across national borders
- Work trade in g&s exceeded 25 trillion in 2019
- Largest 15 trading partners with the US accounted for 75% of the value of US trade
- The 5 largest trading partners with the US in 2019 were mexico, canada, china ,
japan, germany

Size matters: the gravity model


- Why does the US trade more with the 3 largest European economics than with
others?
- These countries have largest GDP, the valuer of g&s produced in an economy, in
europe
- Each european countries share of US trade with europe is roughly equal to its share
of europeans GDP

- The gravity model assumes that size and distance are important for trade in the
following way:

More generally,

Gravity model: looking for anomalies


- The netherlands, Belgium and ireland trade much more with the US than predicted
- Cultural affinity, common language, history of migration, transport cost advantages
Impediments to trade: Distance, barriers and borders

Other things matter bedside size matter for trade:


1. Distance (estimates predict that a 1% increase in distance is associated with a
decrease in the volume of trade of 0.7%-1%)
2. Cultural affinity
3. Geography
4. Multinational corporations
5. Borders

Trade agreements
- Intended to reduce the formalities and tariffs needed to cross borders
- Musch more trade between pairs of canadian provinces than between canadian
provinces and the US, even when holding distance constant

What do we trade?
- Most world trade is in manufactured goods, but minerals-mainly oil- remain important
- Agricultural products such as wheat, soybeans, cotton

Service outsourcing
- (or offshoring) occurs when a firm that provides services moves its operations to a
foreign location
- For example, the worker who restocks the shelves at your local grocery has to be on
site, but the accountant who keeps the grocery’s books could be in another country,
keeping in touch over the Internet. The nurse who takes your pulse has to be nearby,
but the radiologist who reads your X-ray could receive the images electronically
anywhere that has a high-speed connection.

Summary:
- Gravity model relates the trade between any two countries to the sized of their
economics
- International trade is at record levels relative to the size of the world economy, thanks
to falling costs of transportation and communications. However, trade has not grown
in a straight line: The world was highly integrated in 1914, but trade was greatly
reduced by economic depression, protectionism, and war and took decades to
recover.
- Manufactured goods dominate modern trade today. In the past, however, primary
products were much more important than they are now; recently, trade in services
has become increasingly important.
- Developing countries, in particular, have shifted from being mainly exporters of
primary products to being mainly exporters of manufactured goods.

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