International economics: Lect 1 part 1 (overview world trade…
International economics: Lect 1 part 1
overview world trade
Globalization: then and now
Changing composition of trade
What explains trade flows? the gravity model
World trade – how much, and who trades with whom?
Who trades with whom?
Most trade between developed countries
developing countries are catching up
The gravity model
What explains trade flows? The gravity model
Note: Introduced by Jan Tinbergen in 1962
Us european trading partners: Germany, UK, France why these?
These countries have the
largest gross domestic product (GDP)
1.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 they sell, so they are able to buy more imports.
The gravity model: trade impediments
Besides size, it matters how easy countries can exchange goods
: if two countries have cultural ties, it is likely that they also have stronger economic ties.
ocean harbors, easily navigable rivers, lack of mountain barriers influence the ease of international transportation
between markets influences transportation costs and therefore the cost of imports and exports (landlocked (Africa) --> problematic)
Borders (= trade policies)
: crossing borders involves formalities that take time and can involve (substantial) monetary costs like tariffs.
these implicit and explicit costs reduce trade
The gravity model: size and trade impediments
Tij is the value of trade between country i and country j
Yi the GDP of country i
Yj is the GDP of country j
Dij are the trade impediments between country i and country j
(e.g. distance, or language barriers)
a, b, c > 0 measure how important size and trade impediments are (the larger a, b and c, the more important size and trade impediments)
More formally, the gravity model looks like this (borrowed from physics, that’s why called gravity model) FORMULA
The gravity model (cont.)
Gravity model is popular among applied economists and econometricians
=> How important economic size and trade impediments are, can be estimated using
real world data
on trade flows, countries’ GDP, and trade impediments, in combination with some
Simplest way to do this: take (natural) logs on both sides of the gravity equation and use OLS (regression) to get estimates of a, b, and c