0321316762_IM_02

0321316762_IM_02 - Chapter 2 World Trade: An Overview T...

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Chapter 2 World Trade: An Overview T Chapter Organization Who Trades with Whom? Size Matters: the Gravity Model The Logic of the Gravity Model Using the Gravity Model: Looking for Anomalies Impediments to Trade: Distance, Barriers, and Borders The Changing Pattern of World Trade What Do We Trade? Multinational Corporations and Outsourcing Do Old Rules Still Apply? Summary T Key Themes Before entering into a series of theoretical models that explain why countries trade across borders and the benefits of this trade (Chapters 3–11), Chapter 2 considers the pattern of world trade which we observe today. The core idea of the chapter is the empirical model known as the gravity model. The gravity model is based on the observations that: (1) countries tend to trade with other nearby economies and (2) countries’ trade is proportional to their size. The model is called the gravity model as it is similar in form to the physics equation that describes the pull of one body on another as proportional to their size and distance. The basic form of the gravity equation is T ij = A × Y i × Y j /D ij . The logic supporting this equation is that large countries have large incomes to spend on imports and produce a large quantity of goods to sell as exports. This means that the larger either trade partner, the larger the volume of trade between them. At the same time, the distance between two trade partners can substitute for the transport costs that they face as well as proxy for more intangible aspects of a trading relationship such as the ease of contact for firms. This model can be used to estimate the predicted trade between two countries and look for anomalies in trade patterns. The text shows and example where the gravity model can be used to demonstrate the importance of national borders in determining trade flows. According to many estimates, the border
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This note was uploaded on 05/18/2010 for the course ECON 203 taught by Professor Kim during the Spring '10 term at Korea University.

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0321316762_IM_02 - Chapter 2 World Trade: An Overview T...

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