Ch. 2: World Trade: An Overview

Ch. 2: World Trade: An Overview

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47,390

WORLD 2004

GDP (current US$) (billions) 41,290.4

GNI per capita, Atlas method (current US$) 6,329

Life expectancy at birth, total (years) 67.3

Population, total (millions) 6,365.0

Population growth (annual %) 1.2

Surface area (sq. km) (thousands) 133,940.9

UNITED STATES 2004

GDP (current US$) (billions) 11,711.8

GNI per capita, Atlas method (current US$) 41,440

Life expectancy at birth, total (years) 77.4

Population, total (millions) 293.7

Population growth (annual %) 1.0

School enrollment, primary (% net) 93.9

Surface area (sq. km) (thousands) 9,629.1

www.worldbank.org/data 22

$9,136

2010

2010

14,586.7

47,390

78

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http://www.wto.org/english/res_e/statis_e/world_region_export_08_e.pdf

http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20399244~menuPK:1504474~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html

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Notice the difference in numbers and find out why.

Gravity ModelGravity Model

1.1. Size mattersSize matters1.1. Large economies produce diverse products Large economies produce diverse products

for salefor sale

2.2. Large economies have income to buy Large economies have income to buy foreign goodsforeign goods

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1.1. Distance mattersDistance matters1.1. Transportation costsTransportation costs

2.2. ContactsContacts

2.2. Other factorsOther factors1.1. Borders matterBorders matter

1.1. FormalitiesFormalities

2.2. Different currenciesDifferent currencies

2.2. Cultural, linguistic similarityCultural, linguistic similarity

3.3. Ease of transportation, accessEase of transportation, access

4.4. Existence of many MNCsExistence of many MNCs

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Size will increase trade between countriesSize will increase trade between countriesDistance will decrease trade between Distance will decrease trade between

countries.countries.Other factors will be lumped into a Other factors will be lumped into a

constant.constant.

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Trade between two countries (TTrade between two countries (Tijij) is ) is

measured as the volume of trade (exports measured as the volume of trade (exports + imports).+ imports).

Size of country i (YSize of country i (Yii) is the GDP of i.) is the GDP of i.

If size of both countries matters, TIf size of both countries matters, T ijij = =

AYAYiiaaYYjj

bb, where A is a constant that will , where A is a constant that will

include the influences of all other variables include the influences of all other variables and a and b are exponents.and a and b are exponents.

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Size Matters: The Gravity ModelSize Matters: The Gravity Model

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If distance acts as a deterrent to trade, we If distance acts as a deterrent to trade, we can include the distance between i and j can include the distance between i and j (Dij) as a denominator.(Dij) as a denominator.

TTijij = AY = AYiiaaYYjj

bbDDijij-c-c

If a=b=c=1, then TIf a=b=c=1, then Tijij = AY = AYiiYYjj/D/Dijij

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Distance MattersDistance Matters

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US-Canada TradeUS-Canada Trade In 1999, Canada imported C$215 billion of merchandise In 1999, Canada imported C$215 billion of merchandise

from the U.S., which accounted for more than 2/3 of total from the U.S., which accounted for more than 2/3 of total Canadian merchandise imports, and 23% of total U.S. Canadian merchandise imports, and 23% of total U.S. merchandise exports. merchandise exports.

In the same year, Canada exported C$286 billion of In the same year, Canada exported C$286 billion of merchandise to the U.S., which accounted for 87% of merchandise to the U.S., which accounted for 87% of total Canadian merchandise exports, and 19% of total total Canadian merchandise exports, and 19% of total U.S. merchandise imports. U.S. merchandise imports.

Typically, the U.S. trades about as much with Canada as Typically, the U.S. trades about as much with Canada as it does with all 15 countries of the European Union it does with all 15 countries of the European Union combined, and its trade with Ontario alone exceeds its combined, and its trade with Ontario alone exceeds its trade with Japan.trade with Japan.

http://research.stlouisfed.org/wp/2000/2000-024.pdf1212

US-Canada TradeUS-Canada Trade Nearly 90% of the Canadian population lives Nearly 90% of the Canadian population lives

within 100 miles (161 km) of the U.S. border. within 100 miles (161 km) of the U.S. border. The border between Canada and the 48 The border between Canada and the 48

contiguous states stretches for almost 4000 contiguous states stretches for almost 4000 miles (over 6400 km). miles (over 6400 km).

Starting with the 1965 Auto Pact, there has been Starting with the 1965 Auto Pact, there has been an almost uninterrupted trend towards freer an almost uninterrupted trend towards freer bilateral trade, culminating in the 1988 Canada-bilateral trade, culminating in the 1988 Canada-U.S. Free Trade Agreement, subsequently U.S. Free Trade Agreement, subsequently deepened and broadened by the North deepened and broadened by the North American Free Trade Agreement (NAFTA).American Free Trade Agreement (NAFTA).http://research.stlouisfed.org/wp/2000/2000-024.pdf

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US-Canada TradeUS-Canada TradeJohn McCallum (1995) used a gravity John McCallum (1995) used a gravity

model to estimate that in 1988, trade model to estimate that in 1988, trade between provinces within Canada was 22 between provinces within Canada was 22 times the expected amount of trade times the expected amount of trade between the provinces and the states of between the provinces and the states of the U.S.the U.S.

http://research.stlouisfed.org/wp/2000/2000-024.pdf1414

Distance and BordersDistance and Borders

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What about China?What about China?

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http://www.npr.org/blogs/money/2011/08/10/139388532/only-a-tiny-sliver-of-americans-personal-spending-goes-to-china

“… less than 3 percent of personal spending in the U.S. goes to China, according to a new report from the SF Fed.That's partly because most personal spending goes to things like health care and housing that are, by definition, produced in the U.S.”

GlobalizationGlobalization

It is not inevitable.It is not inevitable.1919thth century was more global than 20 century was more global than 20 thth

century, even though technology allowed century, even though technology allowed lower transportation costs, faster lower transportation costs, faster communication tools, etc. in the 20communication tools, etc. in the 20 thth c. c.

Wars and government policies can stop Wars and government policies can stop globalization.globalization.

Since 1980 there has been rapid Since 1980 there has been rapid globalization.globalization.

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GlobalizationGlobalization

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http://www.wto.org/english/res_e/statis_e/its2005_e/its05_world_maps_e.pdf1919

Composition of TradeComposition of Trade

2020

20032008

2121

2222

Changing Composition of TradeChanging Composition of Trade

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Between 1945 and 1980, the World Bank reckons, economic integration was concentrated among rich

countries. Since 1980 that has changed. Manufactured goods rose from 25% of poor-country

exports in 1980 to more than 80% in 1998. This integration was concentrated in two dozen countries—including China, India and Mexico—that are home to 3 billion people. Over the past two decades, these countries have doubled their ratio of trade to national income. In the 1990s their GDP per head grew by an

annual average of 5%. Life expectancy and schooling levels increased.

Another 2 billion people live in the rest of the developing world, where the story is rather different. In these “less globalised” countries, including much

of Africa, the ratio of trade to national output has fallen. In the past decade, income per head has shrunk, and the number of people in poverty has risen. In short, the poor countries that are in the

biggest trouble are those that have globalised the least. The challenge for development—and the World Bank—is to reverse this marginalisation.

http://www.economist.com/finance/displaystory.cfm?story_id=E1_RJRTTN

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Developing countries, or low and middle-income Developing countries, or low and middle-income countries, have also changed the composition of countries, have also changed the composition of their trade.their trade.

In 2001, about 65% of exports from developing In 2001, about 65% of exports from developing countries were manufactured products, and only 10% countries were manufactured products, and only 10% of exports were agricultural products.of exports were agricultural products.

In 1960, about 58% of exports from developing In 1960, about 58% of exports from developing countries were agricultural products and only countries were agricultural products and only 12% of exports were manufactured products.12% of exports were manufactured products.

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Multinational Corporations Multinational Corporations and Outsourcingand Outsourcing

Before 1945, multinational corporations played a Before 1945, multinational corporations played a small role world trade. small role world trade.

But today about one third of all US exports and But today about one third of all US exports and 42% of all US imports are sales from 42% of all US imports are sales from one division of a multinational corporation one division of a multinational corporation to another.to another.

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Trade TheoryTrade Theory

In spite of all the changes observed in In spite of all the changes observed in international trade, the theories utilized international trade, the theories utilized since the first half of the 19since the first half of the 19thth century still century still have strong predictive power.have strong predictive power.

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Ch. 2: World Trade: An Overview