Chapter 2

US' largest trading partners

1. Canada 2. Mexico 3. China 4. Japan 5. Germany

Other factors (besides GDP) that influence trade

1. Cultural affinity 2. Distance between markets 3. Geography of country (location of ports etc) 4. Multinational Corp. 5. Borders (usually deter trade) 6. Language 7. Trade Agreements (encourage trade)

Changing pattern of world trade

1. Direction and composition of world trade has completely changed. 2. Decrease in Agr, increase in manufactured goods 3. Politics is the most influential factor 4. Consumption levels have increased (pop. doubles every 50 years) 5. Increase in services outsourced

Why has trade among Asian countries increased over the past years? Consider East Asian economies share of world GDP and intra-Asian trade.

As E. Asian countries grow, and their markets expand the volume of trade increases. They are able to trade with larger economies. As they become larger consumption demands increase and they are able to import more. S. Korea and Twain were both small nations, but now that they have grown the amount of trade between the two is expected to increase.

How does a country's size influence their trading patterns?

Countries trade with economies of the same size. The larger the economy, the less need for trade (because they have a higher level of autarky)

Sources of modern trade

Human resources and human created trade

Explain relationship between size of GDP and vol. of M & X

Larger countries produce more goods and services--> more to export--> generate more money from exports--> can buy more imports

Does doubling the GDP of countries quadruple trade?

NO. If you double the GDP of the countries involved in trade it doubles the overall trade volume. The country's total percentage of trade increases proportionally.

Trade Agreements

Promote trade and reduce formalities and tariffs needed to cross borders

What is the only industry that creates jobs when traded?

Service

Exceptions to Gravity Model

Strong cultural affinities, low transportation costs EX/ US and Ireland

How does the Gravity Model explain reasons that countries do not trade with each other?

The gravity model states that trade is influenced by the distance between countries. Countries that have greater distances between them will not trade with each other. For example, it makes sense that Mexico would trade heavily with the US instead of the EU. Brazil on the other hand, is far away form both markets. It makes sense that Mexico trades more than Brazil as it is closer to larger markets. Brazil is also in a trade agreement with smaller countries in S. America so this explains why it doesn't trade with the EU.

Why are Canada and S. Korea similar in terms of population and GDP, but differ in trade?

They may have the same amount of people and GDP but this doesn't mean trade will be the same. South Korea is at a disadvantage because of their location. Transportation costs deter trade with most nations (Like Australia). Canada on the other hand shares a border with the US, which is the largest economy in the world, so distance is not an issue. Thus S. Korea is more self reliant and Canada is more open to trade.

Gravity Model Equation

Tij = A (Yi (Yj/ Dij))

Gravity Model

Trade between two countries is influenced by the size of their economies and the geographical distance between them. Predicts volume of trade.

Service Outsourcing

When firms move operations to a foreign location EX/ Call centers to India