Read the summary and the most important questions on International Economics

• 1 World trade: an overview

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• Why does the US trade most with these European countries (Germany, UK and France) and not other European countries?

  These countries have the largest gross domestic product in Europe. GDP meausures the value of goods and services produced in an economy.

• The Gravity Model: size matters. The size of an economy is directly related to the volume of imports and exports. Explain.

  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 they sell, so they are able to buy more imports.

• Besides size, it matters how easy countries can exchange goods. Explain this sentence with refer to distance, cultural affinity, geography and borders.

  • Distance: between markets influences transportation costs and therefore the cost of imports and exports
  • Cultural affinity: if two countries have cultural ties, it is likely that they also have stronger economic ties
  • Geography: ocean harbors, easily navigable rivers, lack of mountain  barriers influence the ease of international transportation
  • Borders: crossing borders involves formalities that take time and perhaps monetary costs like tariffs --> these implicit and explicit costs reduce trade

• Economic size and trade impediments can be summarized in the concept of market access: how easy can someone living in a particular location in the world access large markets nearby?  

  The better the market access, the more a location typically trades.

• Explain the formula for the gravity model: Tij =  (Yia x Yjb) / Dijc

  •Tij is the value of trade between country i and country j

  •Yi the GDP of country i

  •Yj is the GDP of country j

  •Dij are the trade impediments

   

  •a, b, and c measure how important size and trade impediments are

   

    (the larger a, b and c, the more important size and trade impediments)

• The gravity model is popular among applied economists and econometricians. How can be the economic sitze and trade impediments be estimated?

  The economic size and trade impediments can be estimated by using real world date on trade flows, countries GDP and trade impediments in combination with some econometrics.

• The world economy is more integrated than ever, but is the world really becoming flat? (Is distance no longer important in determining (economic) interaction?

  True, many technologies have increased trade and globalization by reducing trade impediments: wheels,sails, compasses,railroads, automobiles, telegraph etc.

  The negative effect of distance on trade has become smaller over time, but it is still far from being insignificant according to estimates of the gravity model: the world is not yet flat!

   

• Political factors (wars or free trade negotiations) can change trade patterns much more than innovators in transportation and communication. Give examples.

  • World trade grew rapidly from 1870  to 1913
  • Then it suffered a sharp decline due to WWI and great depression and WWII
  • Only around 1970 were trade levels back at their pre-WWI levels
  • Since 1970, world trade has only become even more important

  More recent example: decision of China's leaders to open up to world trade markets has transformed international trade.

• Not only the amount of goods traded has changed, also the type of goods traded. What kinds of products do nationas trade now, and how does this composition compare to trade in the past?

  Today most (about 55%) 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 about 20% of the volume of trade.

  Mineral products (petroleum, coal, copper) and agricultural products are a relatively small part of trade.

• Name two important recent developments referring to the composition of trade of intermediate goods and services.

  1. Trade in intermediate goods (used for production not for consumption) concerns more complex international supply chains which increases countries' dependency's
  2. Trade in services: advances in modern communication technology allow more and more tasks to be outsourced, e.g. call centers, accounting, consulting and law services