International Trade - Summary - Tilburg university - Economics
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Course
International trade for ECO
Institution
Tilburg University (UVT)
Book
International Economics
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Summary for the course ''International Trade for ECO''. This summary was written in order to study for the final. Everything you need to know is available in this summary. Advice: this summary alone will not be enough, the tutorials are as importa...
Summary International Trade Theory Lectures ('21 - '22)
International Trade full summary
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International trade for ECO
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INTERNATIONAL
TRADE:
SUMMARY
@ECOsummaries
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1
,International trade Summary
Chapter 1 – video 1 – introduction
International trade: gains from trade, explaining patterns and volume of trade, effects of
government policies on trade
International economics:
- about how nations interact through trade of goods and services, flows of money and investment
- nations are now more closely linked than ever before → hence extra important
- some countries have their imports and exports at a really high % of their total GDP
→ US for example, due to its size and diversity of resources, relies less on international trade than
almost any other country.
Gains from trade:
- the fact that there are gains from trade is probably the most important insight in int. Economics
- Countries selling goods and services to each other almost always generates mutual benefits:
1. When a buyer and a seller engage in a voluntary transaction, both can be made better off.
2. Countries can specialize in production, while consuming many goods and services through trade
3. Allowing countries to export goods made with relatively abundant resources and import goods
made with relatively scarce resources.
4. When countries specialize, they may be more efficient due to larger-scale production
5. Gains by trading current resources for future resources and due to international migration
- Trade is predicted to benefit countries as a whole, but trade may harm particular groups within a
country
Patterns of trade:
- a pattern of trade describes who sells what to whom
- differences in climate and resources explain why brazil exports coffee and Saudi Arabia exports oil
- But why does Japan export cars, while US exports aircraft?
- Labour productivity, relative supplies of capital¸ labour and land.
Effects of government policies on trade
- Tariffs
- Quotas
- Export subsidies
- other regulations
→ what are the costs and benefits of these?
2
,Chapter 2 – video 1 – World trade: An overview
Who trades with whom?
- More than 30% of world output is sold across national borders
- Largest trading partners with the US in 2015 were China, Canada, Mexico, Jap and Ger.
- The largest 15 trading partners with the US accounted for 75% of the value of US trade in
2015
- The 6 largest trading partners with the EU in 2019 were US, China, Switzerland, Russia, turkey
and Japan. (with US → positive trade balance, with China → negative trade balance)
The gravity model:
- 2 of the top 5 trading partners with the US were also the 2 largest European economies:
Germany and the UK
- The US trades more with these European countries because
→ they have the largest GDP in Europe
The positive relation between high GDP and high trade
with US.
- The size of an economy is directly related to the volume of imports and exports.
* large economies produce more goods and service → more to sell in the export market.
* Larger economies generate more income from the goods and services sold → buy more
imports.
- Trade between any two countries is larger, the larger is either country.
A = constant term
Tij = the value of trade between country i and country j
Yi/j = the GDP of country i / j
Dij = the distance between country i and country j
Looking for anomalies:
- A gravity model fits the data on US trade with EU well, but not perfectly.
- The Netherlands, Belgium and Ireland trade much more with the US than predicted by the
gravity model.
→ Ireland has strong cultural affinity due to common language and history of migration.
→ The Netherlands and Belgium have transport cost advantages due to their location.
3
, Impediments to Trade:
1. Distance: influences transportation costs and therefore the cost of import and exports
2. Cultural affinity: close cultural ties, e.g. language, usually lead to strong economic ties
3. Geography: ocean harbours and a lack of mountain barriers make transportation easier
4. Multinational corporations: corporations spread across different nations and import and
export many goods between their divisions.
5. Borders: crossing borders involves formalities that take time, often different currencies need
to be exchanged, and perhaps monetary costs like tariffs reduce trade.
- Estimates of the effect of distance from the gravity model predict that a 1% increase in the
distance between countries is associated with a decrease in the volume of trade of 0.7% to
1%
- Trade agreements are intended to reduce the formalities and tariffs needed to cross
borders, and therefore to increase trade.
- NAFTA: free trade agreement with US, Mexico and Canada (1994)
→ because of NAFTA and the close distance of Mexico and Canada to US, the amount of
trade between the US and its neighbours as a fraction of GDP is larger than between the US
and European countries.
This shows that if Mexico and Canada were part of the
EU, that they were total outliers.
- Yet even with a trade agreement between the US and Canada, the border still serves as a
impediment for trade:
➔ Canadian provinces trade much more between eachother than US trade with Canadian
provinces.
→ Estimates indicate that the border between US and Canada deters trade as much as if
the countries were 1500-miles apart.
4
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