Brazil and Portugal Trade

Relations

International Economics Presentation

Group 4B
INTRODUCTION
 o The Gravity Model says that
the greater the size of the
economy, greater will be its
trade. Here, it also takes into
account the the distance
between both the nations.
o The greater the distance, the
Gravity Model lesser the trade.

- Derived from Newton’s Gravity Model

What is Gravity Model?

(A∗Yi∗Yj)
𝑇=
Dij

Where:
o i & j are two countries
o T is the trade flow between the countries country
o A is the constant
o Yi is the income of i
o Yj is the income of j
o Dij is the distance between nations i & j
Ex 1)

Brazil Portugal
Years 1989 2003 2017 Years 1989 2003 2017

GDP(in billions) 425.595 558.32 2056 GDP(in billions) 60.6 164.964 217.571

Distance(in kms) 7482 7482 7482 Distance(in kms) 7482 7482 7482

1989 2003 2017

3.447081A 12.3099A 59.78695A

o ‘A’ is a constant
o Distance remains the same
o The GDP of both the countries is increasing with the years
o Therefore, the trade volume is increasing with the years as well (calculated according to
formula)

1989 (USD) 2003 (USD) 2017 (USD)

Portugal 3,72,740.48 8,92,642.41 24,43,147.12
Brazil 2,64,666.29 7,75,146.53 22,59,404.08

o Therefore, both countries’ trade volume is increasing with increasing GDPs with the years.
Ex 2)
Portugal and Braziil Niger and Brazil
1989 2003 2017 1989 2003 2017
(USD) (USD) (USD) (USD) (USD) (USD)
GDP(in GDP(in
2.18 2.73 8.12
billions) 60.6 164.964 217.571 billions)
Distance(in Distance(in
7482 7482 7482
kms) 7482 7482 7482 kms)
Trade 3.447081A 12.3099A 59.78695A Trade 0.1240A 0.2037A 2.2313A
Volume Volume
Here, the distance between Niger and Brazil is almost equal to distance between Portugal and Brazil.

1989 (USD) 2003 (USD) 2017 (USD)

Portugal 3,72,740.48 8,92,642.41 24,43,147.12
Niger 10,540.96 17,367.8 21,375.39

o Here, we are proving that: Given two countries with same distance from Brazil, the trade volume of
the country with higher GDP (Portugal) will more than the trade volume of the county with lower
GDP (Niger).
 The Ricardian Model is based on
Absolute Advantage. According
to the law of Comparative
Advantage, even if a nation is
inefficient in producing both the
commodities, the nation will
Comparative produce and export the
commodity in which its absolute

Advantage disadvantage is lower (lower

inefficiency).

- David Ricardo
WHAT IS REVEALED COMPARATIVE ADVANTAGE

Revealed Comparative Advantage is an index used in international economics for

calculating the relative advantage or disadvantage of a certain class of goods or services
as evidenced by trade flows. It is based on the Ricardian Comparative Advantage concept.
VEGETABLES : INCREASED FROM 6.81 IN 1993 TO 8.84 IN 2017

 The vegetable industry’s CA has taken a huge jump as compared to Brazil, from an average
RCA of 6.81 from the 5-year period 1989 to 1993, to 8.84 for the period 2013 to 2017.
 The possible reasons of this may be due to technological advancement in the field of
agriculture.
 The natural factors, Portuguese favorable climate mainly due to the presence of the Atlantic
Ocean and the Mediterranean Sea, offers huge investment opportunities in agriculture, most
prominent in vegetable and food production.
 The fact that agricultural exports to Portugal from Brazil has taken a setback, with the EMBRAPA
not being very efficient there, and the rapid growth of the Portuguese agricultural industry. Thus,
Portugal’s advantage over brazil is understandable.
WOOD:DECREASED FROM 7.81 IN 1993 TO 1.76 IN 2017

 The wood industry of Portugal in comparison has taken a major hit as the average RCA
has dropped from 7.81 in its heyday in 1989 to 1993 to a steep fall to 1.76 in the time period
of 2013 to 2017.
 This steep fall can be attributed to the depressed housing and construction market,
leading to fall in exports.
 Even though it is the leading producer of cork, the demand for cork has fallen significantly,
and the production is also restricted by the fact that a single tree can be stripped only
once in nine years.
CONSUMER GOODS:DECREASED FROM 5.2 IN 1993 TO 1.1 IN 2017

 The RCA of Consumer Goods has also had a fall from 5.2 to 1.1.
 . There could be many reasons for this, including an increase in competitiveness from
Brazil’s viewpoint, which is why exports of consumer goods from Portugal to brazil have
fallen. The competition from
 China in the area of consumer goods could also be a factor.
HIDES AND SKINS:AVERAGE RCA IN BRAZIL REDUCED FROM 8.92 IN 1993
TO 1.2 IN 2017

 The hides and skins industry is a different story however, with Brazil having the comparative
advantage, it is having an average RCA of 8.92 back in 89-93, and Portugal importing a
lot of it.
 This is because of Portugal’s massive footwear industry, where its handmade leather shoes
are world renowned.
 This number has recently dropped to 1.2 for the period of 2013-2017 due to competition
from Italy and other low cost exporters such as China
ANIMAL HUSBANDRY:INCREASED FROM 1.17 IN 1989TO 7.43 IN 2017

 The animal husbandry industry of Portugal has shown remarkable growth, from a mere 1.17
RCA between 1989 to 1993 to an astounding 7.43. This could be attributed to the fact that
 This could be attributed to the fact that Portugal’s beef and pork production has grown by
leaps and bounds, with Portugal exporting nearly $145 million worth of pork meat to the
rest of the world every year.
TEXTILES:MARGINAL INCREASE FROM 1.12 IN 1993 TO 1.74 IN 2017

 The textile industry of Portugal accounts for nearly $968 million worth of its total exports, and is worth 11
percent of its GVA.
 It mainly exports to Spain, and the global clothing brand Zara, accounting for 13% of its exports, but needless
to say, its clothing and textile industry is very well developed.
 They are among the top manufacturers in Europe, mainly owing due to its strategic location, high quality
products and lower costs. The Portugal Fashion week
 The Portugal Fashion week recently marked twenty years, and its prestige is a testament to the highly
successful Portuguese clothing and textile industry. Its CA hasn’t changed by a huge amount with Brazil
though. It had an RCA of 1.12 in the period of 1989 to 1993 and an RCA of 1.74 in the
 It had an RCA of 1.12 in the period of 1989 to 1993 and an RCA of 1.74 in the period from 2013-2017. This
shows an increase, but not one that is huge.
 We can infer from this that even though Portugal in itself is a textile giant, but its fashion is expensive leading
to Brazil using cheaper alternatives.
 Being a developing country, it can be argued that it may not be fully developed for luxury fashion for the
wider population.
TRANSPORT COMMODITIES:INCREASE FROM 0.124 IN 1993 TO 1.018 IN
2017

 The transportation commodity industry in Portugal is also on the rise with 4 major car-
manufacturers in Portugal: Toyota/Salvador Caetano, PSA Peugeot/Citroën, Mitsubishi
FUSO Trucks and Volkswagen AutoEuropa that have made Portugal a manufacturing and
exporting hub for vehicles.
 Cars and vehicle parts make up 7.8% of its total exports to the rest of the world.
 In the earliest five years, we have taken, there was almost negligible trade taking place
between Portugal and Brazil in transportation, as there was an RCA of merely 0.124.
 In the intervening years, the aforementioned companies have opened factories in
Portugal and thus the exports to Brazil have increased, and this in the latest five years there
is an RCA of a much improved 1.018
INTERMEDIATE GOODS:INCREASE FROM 0.42 IN 1993 TO 1.33 IN 2017

 The intermediate goods industries to Brazil has had a significant increase.

 Between 1989 and 1993, the RCA of intermediate goods was merely 0.42 and has
increased by huge amounts over time to 1.33.
 This can be attributed to the fact that Portugal’s manufacturing industry has been growing
by leaps and bounds, and intermediate goods can be finally exported and assembled in
other countries.
 Automotive exports are a good example of this, where factories export CKD’S (completely
knocked down units) to be later assembled in other countries where the company may
not have the same manufacturing infrastructure.
 The Capital to Labour (K/L) ratio
decides the factor endowments
of the economy. When the ratio
is higher than 1, the country has
greater capital and is capital
endowed. When the ratio is less
than 1, the country has more
labour and is labour endowed. If
Factor Endowments it is 1 than the country is equally
endowed in both factors.
BRAZIL’S FACTOR ENDOWMENTS

o Capital flow is less than zero

o Labour is 61.4% (average) of the
population
o Thus Brazil is a labour endowed
country.
PORTUGAL’S FACTOR ENDOWMENTS

o The capital flows of

the Portuguese
economy are positive
o The highest labour is
59.6% of the
population of
Portugal, which is
lower than the lowest
of brazil.
o The population of
Portugal is also much
lower than Brazil’s.
o Therefore, Portugal is
capital endowed.
 There are many similarities and
differences between the two
countries which are discussed
Similarities & below.

Differences
SIMILARITIES

 The common industries are:

• Vegetables
• Wood
• Food products
• Metals
• Transportation
• Hides and Skins
• Fuels
• Plastic or Rubber
• Footwear
SIMILARITIES

 As observed, most of the common industries are labour-intensive industries, with the
exception of Food products, Transportation and Metals.

 Both countries also have high Revealed Comparative Advantages for Vegetables.
REASONS FOR SIMILARITIES

 Both have high Revealed Comparative Advantage in Vegetables

 Wood

 Food Products

 Intensity of Factors of Production

DIFFERENCES

 Brazil in 2017 had the Comparative Advantage in Textiles and Clothing.

 Portugal in 1989 had high Comparative Advantage in Machines and Electricals.

 Portugal in 1989 had better comparative advantage in labour intensive goods while Brazil in
2017 also had comparative advantage in labour intensive goods but not as high.

 On the other hand, Brazil had a much higher RCA in industries like Footwear, Fuels Metals,
Hides/Skins and Plastics/Rubbers.

 Portugal has higher RCA in industries like Food Products, Wood and Vegetables.
REASONS FOR DIFFERENCES

 Capital Intensive Goods

 Textiles and Clothing

 Machines and Electricals

CONCLUSION