Chapter 2: World Trade - An Overview

How many exports were traded across the world?

30%

About ___% of the volume of trade today is in manufactured products such as automobiles, computers, and clothing.

57%

In 1960, about ___% of exports from low- and middle-income countries were agricultural products and only ___% of exports were manufactured products.

58%; 12%

Most jobs (about ___%) need to be done close to the customer, making them nontradable.

60%

In 2001, about ___% of exports from low- and middle-income countries were manufactured products and only ___% of exports were agricultural products.

65%; 10%

The largest 15 partners of the US accounted for ___% of the value of US trade in 2015.

75%

About ___% of the volume of trade today is agricultural products, which is relatively small.

8%

More than ___% of the exports of China consist of manufactured goods.

90%

In 1910, the US mainly imported _________.

agricultural and mineral products

Who were the 5 largest trading partners of the US in 2015?

China, Canada, Mexico, Japan, Germany

How does cultural affinity impact trade?

Close cultural ties, such as common language, usually lead to strong economic ties.

How do multinational corporations impact trade?

Corporations spread across different nations import and export many goods between their divisions.

How do borders impact trade?

Crossing borders involves formalities that take time, often different currencies need to be exchanged, and perhaps monetary costs like tariffs reduce trade. Therefore, they increase the cost and time needed to trade.

How does distance impact trade?

Distance between markets influences transportation costs and therefore the cost of imports and exports.

Service outsourcing can occur for services that can be transmitted

electronically. A firm may move its customer service centers who telephone calls can be transmitted electronically to a foreign location.

Estimates of the effect of distance from the gravity model predict that a 1% ________ in the distance between countries is associated with a _______ in the volume of trade of 0.7% to 1%.

increase; decrease

3 of the top 10 trading partners with the US in 2012 were also the 3 ________ European economies: Germany, the UK, and ______.

largest; France

Political factors, such as wars, can change trade patterns much ____ than innovations in transportation and communication.

more

In 2002, manufactured products made up ______ of the volume of imports and exports for the US and Britain.

most

Service outsourcing is currently ____ a significant part of trade,

not Some jobs are tradable and thus have the potential to be outsourced.

International trade is at record levels

relative to the size of the world economy, thanks to the falling costs of transportation and communications. However, trade ha not grown in a straight line: the world was highly integrated in 1914, but trade was greatly reduced by economic depression, protectionism, and war, and took decades to recover.

Estimates indicate that the US-Canadian border deters trade as much as if the countries were _________ miles apart even with the free trade agreement and common language.

1,500 to 2,500

Anomalies in the Gravity Model

1. A gravity models fits data on US trade with European countries well but not perfectly. 2. The Netherlands, Belgium, and Ireland trade much more with the US than predicted by the gravity model. 3. Ireland has strong cultural affinity due to common language and history of migration. 4. The Netherlands and Belgium have transport cost advantages due to their location.

Why does the US trade more with these European countries than with the others?

1. These countries have the largest GDP in Europe. 2. Each European country's share of US trade with Europe is roughly equal to its share of European GDP

About ___% of the volume of trade today is mineral products such as petroleum, coal, copper, which remain an important part of world trade.

12%

About ___% of the volume of trade today is services such as shipping, insurance, legal fees, and spending by tourists.

24%

gross domestic product (GDP)

A measure of the total value of all goods and services produced within a country's borders for a given time period

gravity model

An economic model stating that the volume of international trade between any two countries is, all else equal, proportional to the product of their GDPs and diminishes with the distance between

trade agreement

An international agreement between countries on conditions governing trade in goods and services, such as levels of tariffs, quotas and other formal barriers to trade.

Tij =(A x Yi x Yj)/Dij

Gravity Model A is a constant term Tij is the value of trade between country i and country j Yi is country i's GDP Yl is country j's GDP Dij is the distance between ant country i and j

Manufactured goods dominate modern trade today.

In the past, however, primary products were much more important that they are now; recently, trade in services has become increasingly important.

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.

How does geography impact trade?

Ocean harbors and lack of mountain barriers make transportation and trade easier.

What is an example of a trade agreement?

The North American Free Trade Agreement signed in 1994 by the US, Mexico, and Canada.

What is a result of the NAFTA?

The amount of trade between the US and its neighbors as a fraction of GDP is larger than between the US and European counties. Canada's economy is roughly the same size as Spain's (around 10% of EU GDP) but Canada trades as much with the US as does all of Europe.

service offshoring (service outsourcing)

The change that occurs when a service previously done within a country is shifted to a foreign location

developing countries

The world's poorer nations

third world

The world's poorer nations

More General Gravity Model

Tij = (A x Yia x Yjb)/Dijc This equation says that the three things that determine the volume of trade between two countries are the size of the two countries' GDPs and the distance between the countries, without specifically assuming that trade is proportional to distance

How do trade agreements impact trade?

Trade agreements between countries are intended to reduce formalities and tariffs needed to cross borders, and therefore increase trade.

Since 1970, world trade as a fraction of world GDP has

achieved unprecedented heights.

In 1910, Britain mainly imported ____________, although manufactured goods still represented most of the volume of exports.

agricultural and mineral products

Developing countries have shifted from

being mainly exporters of primary products to being mainly exporters of manufactured goods.

The negative effect of distance on trade according to the gravity models is significant, but has grown ______ over time due to modern transportation and communication.

smaller

Vertical disintegration of production has contributed to

the rise in the value of world trade through extensive cross-shipping go components. A $100 product can give rise to $200 or $300 worth of international trade flows.

The gravity model reveals

the strong effects of distance and international borders - even friendly borders like that between the US and Canada - in discouraging trade

Just as the gravitational attraction between any two objects is proportional to the product of their masses and diminishes with distance

the trade between any two countries is, other things equal, proportional to the product of their GDPs and dimities with distance

The gravity model relates

the trade between any two countries to the sizes of their economies

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.

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