* Many definitions
* The process that makes trade, transport, transactions, exchange of information and mobility across national (and other) borders and across long distances, cheaper and easier. * Globalization is long run trend for all societies,
* Technological globalization
* Political globalization
Size Matters: The Gravity Model
* Technology for transport and communication
* Combustion engines
* Self sufficiency
* Control with capital movements
* ”Similar” economic system
* Who trades with whom?
Generally trade increases with the size of each trading partner (total GDP) and decreases with the distance between them.
Size Matters: The Gravity Model
* 3 of the top 10 trading partners with the U.S.
in 2008 were also the 3 largest European economies: Germany, U.K., and France. * These countries have the largest gross domestic product (GDP) in Europe. * GDP measures the value of goods and services
produced in an economy.
* Why does the U.S. trade most with these European countries and not other European countries?
Other things besides size matter for trade:
1. Distance between markets influences transportation costs and therefore the cost of imports and exports. * Distance 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: ocean harbors and a lack of mountain barriers make transportation and trade easier. 4. Trade Policy:
5. Multinational corporations: corporations spread across different nations import and export many goods between their divisions. 6. Borders: crossing borders involves formalities that take time and perhaps monetary costs like tariffs. * These implicit and explicit costs reduce trade.
* The existence of borders may also indicate the existence of different languages or different currencies, either of which may impede trade more.
In its basic form, the gravity model assumes that only size and distance are important for trade in the following way: Tij = A x Yi x Yj /Dij
Tij is the value of trade between country i and country j
A is a constant
Yi the GDP of country i
Yj is the GDP of country j
Dij is the distance between country i and country j
In a slightly more general form, the gravity model that is commonly estimated is Tij = A x Yia x Yjb /Dijc
where a, b, and c are allowed to differ from 1.
The gravity model works fairly well in predicting actual trade flows.
* Less trade in agricultural goods
* More trade in services
* Developing countries are becoming more important
* Trade in services increase in importance
Gains from Trade
* Several ideas underlie the gains from trade
1. When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off. * Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing. * The producer of the oranges receives income that it can use to buy the things that it desires. *
* How could a country that is the most (least) efficient producer of everything gain from trade? 2. With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume. 3. Countries can specialize in production, while consuming many goods...
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