Chapter 2

World Trade: An Overview

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Índice de Apertua

EXP  IMP
IA 
PIB

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What Is International Economics
About?

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What Is International Economics

About?

• International trade as a fraction of the national economy

has tripled for the US in the past 40 years.

• Compared to the US, other countries are even more tied

to international trade.

• IE is more important for other countries than to the

U.S.
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Índice de Apertura. Fuente: Banco Mundial
Índice de Apertura entre 2012 y 2013
300%
País 2012-2013
Singapur 295.0%
250%
Bélgica 167.0%
China 67.0%
200%
México 66.0%
Italia 60.0%
150%
Uruguay 55.8%
España 55.0%
100%
Perú 50.1%
Venezuela 39.5%
50%
Argentina 30.0%
Brasil 26.5%
0%
Egipto 18.5%

2012-2013
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Changing Composition of Trade

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2008: The Composition of World
Trade

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Changing Composition of Trade

• What kinds of products do nations currently trade,
and how does this composition compare to trade in the past?
• Today, most of the volume of trade is in manufactured
products such as automobiles, computers, clothing and
machinery.
 Services such as shipping, insurance, legal fees and spending by
tourists account for 20% of the volume of trade.
 Mineral products (e.g., petroleum, coal, copper) and agricultural
products are a relatively small part of trade.

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 Lectura asignada

• Leer el capítulo 2 del texto.

• Hacer por equipos la Tarea 1

localizada en Moodle.

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El Modelo de la Gravedad

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5
 Who Trades with Whom?
• The 5 largest trading partners with the
US in 2007 were Canada, China, Mexico,
Japan and Germany.
• The total value imports from and exports
to Canada in 2003 was almost $400
billion dollars.
• The largest 10 trading partners with the
US accounted for 68% of the value of US trade in
2003.

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Who Trades with Whom?

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Who trades with whom? 2008
Source: U.S. Department of Commerce

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The Gravity Model

• 3 of the top 10 trading partners with the US in 2003 were
also the 3 largest European economies: Germany, UK and
France.
• These countries have the largest gross domestic product
(GDP) in Europe.
 GDP measures the value of goods and services
produced in an economy.

• Why does the US trade most with these European countries

and not other European countries?

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 The Gravity Model

• In fact, 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 people are able
to buy more imports.
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The Gravity Model

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 El Modelo de Gravedad

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El Modelo de Gravedad

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 Distance and Borders

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El Modelo de Gravedad

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 The Gravity Model
Other things besides size matter for trade:

1. Distance between markets influences transportation costs and

therefore the cost of imports and exports.
 Distance may also influence personal contact and communication, which
may influence trade.
2. Cultural affinity: if two countries have cultural ties, it is likely
that they also have strong economic ties.
3. Geography: ocean harbors and a lack of mountain barriers
make transportation and trade easier.

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The Gravity Model

4. Multinational corporations: corporations spread across

different nations import and export many goods between their
divisions.
5. Borders: crossing borders involves formalities that take time
and perhaps monetary costs like tariffs.
 These implicit and explicit costs reduce trade.
 The existence of borders may also indicate the existence of different
languages (see 2) or different currencies, either of which may impede
trade more.

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 The Gravity Model

• In its basic form, the gravity model

assumes that only size and distance are
important for trade in the following way:
Yj
Tij  A  Yi 
• where
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

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The Gravity Model

Yj
• In a slightly more general form, Tij  A  Yi 
the gravity model that is
Dij
commonly estimated is:

• Perhaps surprisingly, the

gravity model works fairly well Tij Dijc
in predicting actual trade flows, A
as the figure above representing Yi aY jb
US–EU trade flows suggested.
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 Distance and Borders

• 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 0.7% to 1%.

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Próxima clase

1. Leer el Capítulo 3 del libro de

texto.
2. Hacer la Tarea número 2
disponible en Moodle.

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