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International Trade full summary
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2021 - 2022International Trade
Vrije Universiteit Brussel
, 1st Master International Business
International Trade
What is international trade about?
Trade theory
Countries engage in international trade for two basic reasons, each of which contributes to their
gains from trade:
1) Countries trade because they are different from each other countries differ in resources,
productivity levels, available technology,.. and they can benefit from these differences by
reaching an arrangement in which each does the things that they do relatively well. Countries
will specialize in what they do well.
2) Countries trade to achieve economies of scale in production if a country produces only a
limited range of goods, they can produce each of these goods at a larger scale, larger
quantities so it can be more efficiently than trying to produce everything.
There is always interaction between both, it’s not just one or the other, they often work
simultaneously.
World trade: an overview (Chapter 2)
Countries trade because they are different from each other:
o Ricardian model (Chapter 3)
o Specific factors model (Chapter 4)
o Heckscher-Ohlin model (Chapter 5)
o Standard Trade model (Chapter 6)
Countries trade to achieve economies of scale in production:
o External – industry (Chapter 7)
o Internal – firm (Chapter 8)
Trade Policy
▪ Instruments of trade policy (Chapter 9)
▪ Trade policy: theory and practice (Chapters 10 and 11)
▪ Controversies in trade policy (Chapter 12)
Page | 2
, 1st Master International Business
Chapter 2 : World trade: an overview
Let’s explore
• Imports (value + as % of GDP)
• Exports (value + as % of GDP)
• Top 5 trading partners (for export and for import)
• Top 5 traded products (for export and for import)
• History: evolution for past 70 years? Important shifts/events?
• Is the country member of an international trade agreement? Since?
Distance will have an influence on these aspects. Top trading partners will usually not be too far from
each other.
Trade agreements have an influence on these aspects.
Size matters: the gravity model
The value of trade between any two countries is proportional, other things equal, to the product of
the two countries’ GDPs and diminishes with the distance between the two countries:
This is a model that economist often use, what is the difference between
these 2? The second equation says that the free things that determine
the volume of trade between 2 countries are the size of the 2 countries
GDP and the distance between the 2 countries without specifically
assuming that trade is proportional to the products of the 2 GDP’s.
instead of that, there are these exponents (a,b and c) who are chosen to
fit the actual data as closely as possible. In this equation we assume that a,b and c are equal to 1.
Why does the gravity model work? Broadly speaking, large economies tend to spend large amounts
on imports because they have large incomes. They also tend to attract large shares of other
countries’ spending because they produce a wide range of products. So, other things equal, the trade
between any two economies is larger—the larger is either economy.
Impediments to trade
• Distance : Why does the United States do so much more trade with its North American neighbors
than with its European partners? One main reason is the simple fact that Canada and Mexico are
much closer.
Less tangible factors also play a crucial role.
• Barriers : In addition to being U.S. neighbors, Canada and Mexico are part of a trade agreement
with the United States, the North American Free Trade Agreement, or NAFTA, which ensures that
most goods shipped among the three countries are not subject to tariffs or other barriers to
international trade.
• Borders : It’s important to note, however, that although trade agreements often end all formal
barriers to trade between countries, they rarely make national borders irrelevant. Even when
most goods and services shipped across a national border pay no tariffs and face few legal
Page | 3
, 1st Master International Business
restrictions, there is much more trade between regions of the same country than between
equivalently situated regions in different countries.
Discuss the following: history: evolution for past 70 years? Important shifts/ events?
Discuss the following: Top 5 traded products (for export and import)
What do we trade?
The Composition of World Trade, 2015: Most world trade is in manufactured goods, but minerals—
mainly oil— remain important.
We see that the majority are manufacturing goods, also services have become more and more
important.
In case of the UK, the imports were much lower +- 24% than now where it is +- 74%. There has been
a shift from more primary goods (mining goods) to these manufacturing products.
• Over the past 50 years, the exports of developing countries have shifted toward manufactures.
• For developing countries, the dominance for manufacturing goods is relatively recent.
Page | 4
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