# Ch2

```Ch. 2: World Trade: An Overview
1
WORLD
2004
GDP (current US\$) (billions)
41,290.4
GNI per capita, Atlas method (current US\$)
6,329
Life expectancy at birth, total (years)
67.3
Population, total (millions)
6,365.0
47,390
Population growth (annual %)
1.2
Surface area (sq. km) (thousands)
133,940.9
2010
\$9,136
2004
2010
GDP (current US\$) (billions)
11,711.8
14,586.7
GNI per capita, Atlas method (current US\$)
41,440
47,390
Life expectancy at birth, total (years)
77.4
Population, total (millions)
293.7
Population growth (annual %)
1.0
School enrollment, primary (% net)
93.9
Surface area (sq. km) (thousands)
9,629.1
UNITED STATES
78
www.worldbank.org/data
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http://www.wto.org/english/res_e/statis_e/world_region_export_08_e.pdf
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Notice the difference in numbers and find out why.
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Gravity Model
1.
Size matters
1.
2.
Large economies produce diverse products
for sale
Large economies have income to buy
foreign goods
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Gravity Model
1.
Distance matters
1.
2.
2.
Transportation costs
Contacts
Other factors
1.
Borders matter
1.
2.
2.
3.
4.
Formalities
Different currencies
Cultural, linguistic similarity
Ease of transportation, access
Existence of many MNCs
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Gravity Model
Size will increase trade between countries
 Distance will decrease trade between
countries.
 Other factors will be lumped into a
constant.

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Gravity Model
Trade between two countries (Tij) is
measured as the volume of trade (exports
+ imports).
 Size of country i (Yi) is the GDP of i.
 If size of both countries matters, Tij =
AYiaYjb, where A is a constant that will
include the influences of all other variables
and a and b are exponents.

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Size Matters: The Gravity Model
9
Gravity Model
If distance acts as a deterrent to trade, we
can include the distance between i and j
(Dij) as a denominator.
 Tij = AYiaYjbDij-c
 If a=b=c=1, then Tij = AYiYj/Dij

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Distance Matters
11



In 1999, Canada imported C\$215 billion of merchandise
from the U.S., which accounted for more than 2/3 of total
Canadian merchandise imports, and 23% of total U.S.
merchandise exports.
In the same year, Canada exported C\$286 billion of
merchandise to the U.S., which accounted for 87% of
total Canadian merchandise exports, and 19% of total
U.S. merchandise imports.
it does with all 15 countries of the European Union
combined, and its trade with Ontario alone exceeds its
http://research.stlouisfed.org/wp/2000/2000-024.pdf
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


Nearly 90% of the Canadian population lives
within 100 miles (161 km) of the U.S. border.
The border between Canada and the 48
contiguous states stretches for almost 4000
miles (over 6400 km).
Starting with the 1965 Auto Pact, there has been
an almost uninterrupted trend towards freer
deepened and broadened by the North
http://research.stlouisfed.org/wp/2000/2000-024.pdf
13

John McCallum (1995) used a gravity
model to estimate that in 1988, trade
between provinces within Canada was 22
times the expected amount of trade
between the provinces and the states of
the U.S.
http://research.stlouisfed.org/wp/2000/2000-024.pdf
14
Distance and Borders
15
“… less than 3 percent of personal spending
in the U.S. goes to China, according to a
new report from the SF Fed.
That's partly because most personal
spending goes to things like health care and
housing that are, by definition, produced in
the U.S.”
http://www.npr.org/blogs/money/2011/08/10/139388532/only-a-tiny-sliver-ofamericans-personal-spending-goes-to-china
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Globalization

It is not inevitable.
19th century was more global than 20th
century, even though technology allowed
lower transportation costs, faster
communication tools, etc. in the 20th c.
 Wars and government policies can stop
globalization.
 Since 1980 there has been rapid
globalization.

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Globalization
18
http://www.wto.org/english/res_e/statis_e/its2005_e/its05_world_maps_e.pdf
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2003
2008
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http://www.economist.com/financ
e/displaystory.cfm?story_id=E1_
RJRTTN
Between 1945 and 1980, the World Bank reckons,
economic integration was concentrated among rich
countries. Since 1980 that has changed.
Manufactured goods rose from 25% of poor-country
exports in 1980 to more than 80% in 1998. This
integration was concentrated in two dozen
countries—including China, India and Mexico—that
are home to 3 billion people. Over the past two
decades, these countries have doubled their ratio of
trade to national income. In the 1990s their GDP per
head grew by an annual average of 5%. Life
expectancy and schooling levels increased.
Another 2 billion people live in the rest of the
developing world, where the story is rather different.
In these “less globalised” countries, including much
of Africa, the ratio of trade to national output has
shrunk, and the number of people in poverty has
risen. In short, the poor countries that are in the
biggest trouble are those that have globalised the
least. The challenge for development—and the
World Bank—is to reverse this marginalisation. 24

Developing countries, or low and middle-income
countries, have also changed the composition of

In 2001, about 65% of exports from developing
countries were manufactured products, and only 10%
of exports were agricultural products.

In 1960, about 58% of exports from developing
countries were agricultural products and only
12% of exports were manufactured products.
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26
Multinational Corporations
and Outsourcing

Before 1945, multinational corporations played a

But today about one third of all US exports and
42% of all US imports are sales from
one division of a multinational corporation
to another.
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