ECON7530 International Trade and Investment代写

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    • ECON7530  International Trade and Investment代写
    ECON7530 
    International Trade and Investment
    Summer Semester 2016/17
    Michael Graff
    Slide Set 2 2
    Today’s activities
     The gravity model
    • Krugman/Obstfeld/Melitz, Chapter 2
     The Ricardian model
    • Krugman/Obstfeld/Melitz, Chapter 3
     Tasks and exercises3
    The gravity model
    Influence of size and distance as 
    well as other factors on trade4
    Hypothetical world spending shares 
    and GDP 5
    Values of exports ($ trillion)6
    Total US trade with major partners, 2012
    Source: US Department of Commerce7
    The size of European economies, and the 
    value of their trade with the United States8
    Economic size and trade
    with the United States
    Source: US Department of Commerce, European Commission9
    The gravity model
    Other things besides size matter for trade: 
    1. Distance between markets influences transportation costs and 
    therefore the cost of imports and exports. It may also influence 
    personal contact and communication, which may influence trade. 
    2. Cultural affinity: if two countries have cultural ties, it is likely that 
    they also have strong economic ties.
    3. Geography: harbours and lack of mountain barriers make 
    transportation and trade easier.
    4. Multinational corporations: corporations spread across different 
    nations import and export many goods between their divisions.
    5. Borders: crossing borders involves formalities that take and costs. 
    • These implicit and explicit costs reduce trade. 
     
    where a, b, and c are allowed to differ from 1.11
    The gravity model: estimation
    General form of the gravity model:
    Tij
    = A Yi
    a Yj
    b /Dij
    c
    Linearise by taking natural logs
    ln Tij
    = ß0 + ß1 ln Yi
    + ß2 ln Yj
    – ß3 ln Dij
    Run multiple regression where ß0, ß1, ß2 and ß3, and are 
    the point estimates corresponding to ln A, a, b and c.12
    The gravity model: evidence
     Model works fairly well (given its 
    simplicity) in predicting trade flows.
    • Distance
    • Estimates of the effect of distance from the gravity 
    model
     1% increase in the distance between countries 
    associated with decrease of trade of 0.7% to 1%.13
    The gravity model: evidence
     Border effects
    • Borders increase cost and time needed to trade.
    • Trade agreements between countries are intended to 
    reduce the formalities and tariffs needed to cross 
    borders, and therefore to increase trade. 
    • The US signed a free trade agreement with Mexico and 
    Canada in 1994, the North American Free Trade Agreement 
    (NAFTA).
     Yet even with a free trade agreement between the US and 
    Canada, which use a common language, the border between 
    these countries still reduces trade.14
    Canadian Provinces and US States that 
    trade with British Columbia15
    Trade with British Columbia,
    per cent of GDP, 200916
    Has the world become “smaller”?
     The negative effect of distance on trade according 
    to the gravity models is significant, but it has grown 
    smaller over time due to modern transportation 
    and communication.
    • Wheels, sails, compasses, railroads, telegraph, steam 
    power, automobiles, telephones, airplanes, computers, fax 
    machines, internet, fiber optics, personal digital assistants, GPS 
    satellites… are technologies that have increased trade. 
     But history has shown that political factors, such as 
    wars, can change trade patterns much more than 
    innovations in transportation and communication.17
    Fall and rise of world trade,1900 to 201218
    Has the world become “smaller”? (ctd)
     Globalisation during the last two centuries
    • 1840 to 1914
    • Steam power, railroads, telegraph, telephones 
    • Globalisation subsequently interrupted and reversed 
    by world wars, depression and the “cold war”
    • 1945 to present
    • Telephones, airplanes, computers, internet, fiber optics, GPS 
    satellites… 19
    The composition of world trade, 2011
    Source: World Trade Organization20
    Changing composition of trade
     What kinds of products do nations currently 
    trade, and how does this composition compare 
    to trade in the past?
    • In the past, a large fraction of the volume of trade 
    came from agricultural and mineral products.
    • Today, most of the volume of trade is in manufactured 
    products such as automobiles, computers, clothing 
    and machinery.
    • Services such as shipping, insurance, legal fees, and 
    tour
    ECON7530  International Trade and Investment代写
    Global output will increase by 70 000 
    computers if US concentrates on computer 
    production and Ecuador on rose production
    Millions of Roses Thousands of 
    Computers
    US -10 +100
    Ecuador +10 -30
    Change in “world” 
    production
    0 +7034
    A one factor Ricardian model
    Assumptions
    1. Labour is the only resource important for production.
    2. Labour productivity varies across countries, but in each 
    country it is constant across time.
    3. The supply of labour (L) in each country is constant.
    4. Only two goods are important for production and 
    consumption: wine (w) and cheese (c).
    5. Competition allows workers to gain a “competitive” wage, a 
    function of their productivity and the price of the good that 
    they can sell, and allows workers to work in the industry that 
    pays the highest wage.
    6. Only two countries are modeled: domestic and foreign.
    7. Labour is fully employed and mobile between industries.35
    “Unit labour requirement” defined
     Unit labour requirement (“labour coefficient”): 
    hours of labour required to produce one unit of output
    • aLW : unit labour requirement for wine in the domestic country
    • For example, if  aLW = 2, then it takes 2 hours of labour to produce 
    one litre of wine in the domestic country
    • aLC : unit labour requirement for cheese in the domestic country
    • For example, if aLC = 1, then it takes 1 hour of labour to produce 
    one kg of cheese in the domestic country
    • A high unit labour requirement means low labour productivity.  
    • In the domestic country, cheese production has higher labour 
    productivity than wine production.
    • Denote the total number of labour hours worked in the domestic 
    country as a constant L.36
    Production possibility frontier
     
    We can tell that in autarky (no trade), cheese is going to be cheap 
    relative to wine in the home country, while in the foreign country, 
    • The economy will specialise in cheese 
    production if the price of cheese relative to 
    the price of wine exceeds the opportunity cost 
    of producing cheese.48
     
    • The economy will specialise in wine production if the 
    price of wine relative to the price of cheese exceeds 
    the opportunity cost of producing wine.49
    Home cheese 
     
     A country can be more efficient in producing both goods, 
    but it will usually have a comparative advantage in one 
    good; the good that uses resources most efficiently 
    compared to alternative production.
     Ricardo: even if a country is the most (or least) efficient 
    producer of all goods, it still can benefit from trade.57
    Ricardo’s example (1819)
    Portugal:  cloth aLC
    P =  90 wine aLWP =  80
    England:  cloth aLC
    ECON7530  International Trade and Investment代写