ECON40710
International Trade
Prof. Antoine Gervais
Plan for Today
• Chapter 1: Introduction
• Syllabus
• Chapter 2
– Facts
– The Gravity Model
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Chapter 1
Introduction
International Economics
• International trade
– studies the movement of goods and services
across international borders
• International finance
– Studies the monetary interactions between
countries
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Objectives
– Learn main international trade theories (develop
formal models)
– Use the theoretical models to learn about the
impact of international trade
– Problem solving: using analytical methods, in an
orderly manner, for finding solutions to
problems.
– Critical thinking: the objective analysis and
evaluation of an issue in order to form a
judgment.
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Fundamental Questions
What are the fundamental questions
in international trade?
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Fundamental Questions
1. Patterns of Trade
– Why do countries trade with each other?
– Why do they trade certain products rather than other?
2. Welfare
– What is the impact of trade on the countries involved?
– How do trade policies affect welfare?
3. Redistribution
– Does international trade creates “winners and losers”?
– Who gains from trade?
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Before we provide answers
• Syllabus
• Class website:
http://www3.nd.edu/~agervais/courses.html
• Paul R. Krugman (1993), What Do Undergrads
Need to Know About Trade?, American Economic
Review, 83(2), 23-26.
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Chapter 2
World Trade:
An Overview
A. How important is trade ?
§ In 2015 (billion $US)
§ World Export: $20,750
§ Merchandise: $16,000
§ Services: $4,750
§ World GDP: $73,900
§ The ratio of trade to GDP is about 28 percent
Source: WTO World Trade Statistics 2016
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A. How important is trade ?
Decrease in price and demand
for fuels and mining products
Recession
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A. How important is trade ?
Decrease in price and demand
for fuels and mining products
Recession
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Fig. 1-1: Exports and Imports as a
Percentage of U.S. National Income
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Fig. 1-1: Exports and Imports as a
Percentage of U.S. National Income
• U.S. exports and imports as shares of gross
domestic product have been on a long-term
upward trend.
– International trade has roughly tripled in
importance compared to the economy as a
whole in the past 50 years.
– Both imports and exports fell in 2009 due to the
recession.
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Fig. 1-2: Average of Exports and Imports as
Percentage of National Income in 2011
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Fig. 1-2: Average of Exports and Imports as
Percentage of National Income in 2011
• Compared to the United States, other countries are
even more tied to international trade.
– Their imports and exports as a share of GDP are
substantially higher.
– The United States, due to its size and diversity of
resources, relies less on international trade than
almost any other country.
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B. Which Countries Trade?
Economies by size of
merchandise trade, 2015
Source: International Trade Statistics 2016, WTO
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B. Which Countries Trade?
Economies by size of trade
in commercial services, 2015
Source: International Trade Statistics 2016, WTO
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B. Which Countries Trade?
Source: http://www.worldmapper.org/
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B. Which Countries Trade?
Export values and share
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B. Which Countries Trade?
• The top ten merchandise traders accounted for 52% of the
world’s total trade in 2015.
• The top ten traders in commercial services accounted for
53% of the world’s total trade in 2015.
Source: International Trade Statistics 2016, WTO
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B.
Leading economies of
merchandise
trade, 2011
Which
Countries
Trade?
IMPORTS
US$ BILLION
40%
2700
United States
2300
1900
Germany’s trad
surplus is 40% hig
than China’s
China
1500
Japan
1100
Germany
The United State
was the world’s
biggest merchand
trader in 2011
France
700
300
US$ 1,480
Netherlands
Exports
0
0
200
400
600
800
1000
1200
1400
EXPORTS US$ BILLION
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1600
1800
2000
2200
US$ 2,266
Source: International Trade Statistics 2011, WTO
Imports
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Trading Partners
Merchandise trade flows within regions
outperform flows between regions
Merchandise exports by region and
destination 2011 (US$ billion)
24
480 199
Commonwealth of
Independent States
234
119
154
409
476
s Trade
in No
Europ
region
expor
2011.
trade
while
Amer
of the
Agree
117
639
194
37
1103
34 12
906
11
Europe
152
s In So
per c
count
Comm
(CIS)
totals
and 9
242
North
America
15
Asia
201
107
4667
63
102
140
922
2926
110
382
Central & South
America & the
Caribbean 18
38
158
77
21
Africa
8
205
660
10
6
21
169
189
110
Middle
East
146
2
Afri
19
138
s Africa
expor
by As
over h
and t
still A
and C
to No
to As
Asi
Com
200
Cen
Eur
Mid
Nor
Source: International Trade Statistics 2011, WTO
24%
50%
of total world exports
of Central and South
are from North
America exports sent to
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Pearson
Education,
America and Europe
North
America
in 2011 Inc. All rights reserved.
Where to find more:
53%
of Middle East products
were exported to Asia in
2011
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All figures
C. The Gravity Model
• 3 of the top 10 trading partners with the U.S.
in 2012 were also the 3 largest European
economies: Germany, the United Kingdom, and
France.
• Why does the United States trade more with these
European countries than with others?
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C. The Gravity Model
• The gravity model assumes that size and distance
are important for trade in the following way:
Tij = (A x Yi x Yj ) / Dij
Tij is the value of trade between country i and country j
A is a constant
Yi the GDP of country I, Yj is the GDP of country j
Dij is the distance between country i and country j
• Or more generally
Tij = ( A x Yia x Yjb ) / Dijc
where a, b, and c are allowed to differ from 1.
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Fig. 2-2: The Size of European Economies,
and the Value of Their Trade with the United
States
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C. The Gravity Model
• The size of an economy is directly related to the
volume of imports and exports.
– 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 either country.
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Fig. 2-3: Distance and Trade
with the United States
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C. The Gravity Model
• The distance between countries is directly related
to the volume of trade between them.
– Estimates of the effect of distance from the
gravity model predict that a 1% increase in the
distance between countries is associated with a
decrease in the volume of trade of about 1%.
Trade between any two countries is larger,
when the countries are close.
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C. The Gravity Model
• Why is distance such a good predictor of trade flows?
• There are many impediments to trade, most of which are
related to distance
1.
Natural barriers
– Distance between markets influences transportation
costs and therefore the cost of imports and exports.
– Geography: ocean harbors and a lack of mountain
barriers make transportation and trade easier.
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C. The Gravity Model
2.
Artificial barriers
– close cultural ties, such as a common language, usually
lead to strong economic ties.
– crossing borders involves formalities that take time,
often different currencies need to be exchanged, and
perhaps monetary costs like tariffs reduce trade.
• Data shows that there is much more trade between pairs of
Canadian provinces than between Canadian provinces and
U.S. states, even when holding distance constant.
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Fig. 2-4: Canadian Provinces and U.S. States
that Trade with British Columbia
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Table 2-1: Trade with British
Columbia, as Percent of GDP, 2009
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D. Has the World Gotten Smaller?
• The negative effect of distance on trade according
to the gravity models is significant, but has grown
smaller over time due to modern transportation and
communication.
• Technologies that have increased trade:
– Wheels, sails, compasses, railroads, telegraph, steam
power, automobiles, telephones, airplanes, computers, fax
machines, Internet, fiber optics, personal digital assistants,
GPS satellites…
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D. Has the World Gotten Smaller?
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D. Has the World Gotten Smaller?
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D. Has the World Gotten Smaller?
• Political factors, such as wars, can change trade patterns
much more than innovations in transportation and
communication.
• World trade grew rapidly from 1870 to 1913.
– Then it suffered a sharp decline due to the two world wars
and the Great Depression.
– It started to recover around 1945 but did not recover fully
until around 1970.
• Since 1970, trade as a fraction of GDP has achieved
unprecedented heights in many countries.
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E. The Composition of Trade
Fig. 2-6: World Trade, 2011
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Fig. 2-6: The Composition of World
Trade, 2011
• What kinds of products do nations trade now, and
how does this composition compare to trade in the
past?
• Today, most (about 53%) of the volume of trade is
in manufactured products such as automobiles,
computers, and clothing.
– Services such as shipping, insurance, legal fees, and
spending by tourists account for about 20% of the volume
of trade.
– Mineral products (ex., petroleum, coal, copper) remain an
important part of world trade at 19%
– Agricultural products are a relatively small (8%) part of
trade.
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Fig. 2-7: The Changing Composition of
Developing-Country Exports
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Fig. 2-7: The Changing Composition of
Developing-Country Exports
• Low- and middle-income countries have also
changed the composition of their trade.
– In 2001, about 65% of exports from low- and middleincome countries were manufactured products, and only
10% of exports were agricultural products.
– In 1960, about 58% of exports from low- and middleincome countries were agricultural products and only 12%
of exports were manufactured products.
• More than 90 percent of the exports of China, the
largest developing country and a rapidly growing
force in world trade, consist of manufactured
goods.
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Summary
1. World trade account for a large fraction of world
GDP and increases over time
2. A few countries account for the bulk of trade
3. Countries vary in their degree of “openness”
4. Distance matters: most trade is within region
5. Trade is mostly manufactured goods
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