02 World Trade - World Trade An Overview Who Trades with Whom Who Trades with Whom The USs 5 largest trading partners are Canada China Mexico Japan

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1 1 World Trade: An Overview • Who Trades with Whom? • The Gravity Model • Other Factors Influencing Trade • Has the World become “Smaller” • The Changing Composition of Trade 4 Who Trades with Whom? • The US’s 5 largest trading partners are Canada, China, Mexico, Japan, and Germany. • Most US trade is with its top 10 trading partners. – They accounted for two-thirds of US trade. •Why ? 5 U.S. Major Trade Partners 6 The Gravity Model: Size Matters • There is a strong positive empirical relationship between the bilateral trade volumes of any 2 countries and the size of those 2 countries’ economies.
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2 7 Size Matters 8 The Gravity Model: Distance Matters • There is a strong negative empirical relationship between the bilateral trade volumes of any 2 countries and the distance between those two countries. 9 Distance Matters 10 The Gravity Model • Thus, trade volumes between any 2 countries can be approximated by: T ij = A * ( Y i * Y j ) / D ij –where
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3 11 The Gravity Model •T ij is the trade volume between countries i and j, • A is a scalar, •Y i is the GDP of country i, j is the GDP of country j, and •D ij is the distance between countries i and j. 12 The Gravity Model • This equation says that the value of trade between any two countries is: – Proportional to the product of their GDPs, – But diminished by the distance between the two countries, – all other things equal. 13 The Gravity Model • A more general form of the gravity model is that is often estimated is: T ij = A * ( Y i a * Y j b ) / D ij c – Where a, b, and c can be different from 1. 14 The Gravity Model • The Logic of the Gravity Model –The size of an economy is directly related to the volume of its imports and exports.
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This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at University of California, Berkeley.

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02 World Trade - World Trade An Overview Who Trades with Whom Who Trades with Whom The USs 5 largest trading partners are Canada China Mexico Japan

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