Chapter 2

W
o
r
l
d
T
r
a
d
e
:
A
n
O
v
e
r
v
i
e
w
W
h
o
T
r
a
d
e
s
w
i
t
h
W
1

t
r
a
d
e

hom?

What percent
of all world
production of
goods and
services is
exported to
other
countries?

i
n
s
e
r
v
i
c
e
s

10%

30%

h
a
s

50%

g
r
o
w
n

100%

None of the
above.
A
B

f
a
s
t
e
r

Q
Previous
Edition

t
h
a
n

The gravity
model offers a
logical
explanation
for the fact
that

t
r
a
d
e

trade
between Asia
and the U.S.
has grown
faster than
NAFTA
trade.

i
n
g
o
2

ods.

w
i
l
l

trade in
manufactures
has grown
faster than in
agricultural
products.

e
v
e
n
t
u
a
l
l
y

IntraEuropean
Union trade
exceeds
International
Trade of the
European
Union.

b
e
s
w
a
l
l
o
w
e
d

None of the
above.
A
D
Q
Previous
Edition

b
y

The gravity
model
suggests that
over time

a
b
l
a
c
k

trade
between
neighboring
countries will
increase.

h
o
l
e
.

trade
between all
countries will
increase.

t
r
a

world trade
3

de between
Earth and
other planets
will become
important.

t
h
a
n
o
t
h
e
r

None of the
above.
A
E
Q
Previous
Edition

f
o
r
m
s

The gravity
model
explains why

o
f
t
r
a
d
e

trade
between
Sweden and
Germany
exceeds that
between
Sweden and
Spain.

b
e
t
w
e
e
n

countries
with oil
reserves tend
to export oil.

n
e
i
g
h
b
o
r
i
n
g

capital rich
countries
export capital
intensive
products.

intraindustry
trade is
relatively
more
important

c
o
u
n
t
4

ries.

t
h
e

None of the
above.
A
A

a
v
e
r
a
g
e

Q
Previous
Edition

b
y

According to
the gravity
model, a
characteristic
that tends to
affect the
probability of
trade existing
between any
two countries
is

t
h
e
i
r
i
n
d
u
s
t
r
i
e
s
.

their cultural
affinity.

the average
weight/value
of their
traded
goods.

their
colonialhistorical
ties.

P
r
e
v
i
o
u
s

the distance
between
them.

E
d
i
t
i
o
n

the number
of varieties
produced on
5

I
n
g
e
n
e
r
a
l
w
h
i
c
h
o
f
t
h
e
f
o
l
l
o
w
i
n
g
t
e
n
d
t
o
p
r
o
m
o
t
e
6

the
probability of
trade
volumes
between two
countries

i
n
t
e
r
n
a
t
i
o
n
a
l

linguistic
and/or
cultural
affinity.

historical
ties.

sizes of
economies.

t
r
a
d
e
.

mutual
membership
in
preferential
trade
agreements.

L
a
r
g
e
e
c
o
n
o
m
i
e
s

All of the
above.
E
Previous
Edition

Why does the

gravity
model work?

h
a
v
e

Large
economies
became large
because they
were
engaged in

r
e
l
a
t
i
v
7

ely large
incomes, and
hence spend
more on
government
promotion of
trade and
investment.

c
o
n
s
i
d
e
r
a
b
l
y

Large
economies
have
relatively
larger areas
which raises
the
probability
that a
productive
activity will
take place
within the
borders of
that country.

m
o
r
e
w
i
t
h
t
h
e

Large
economies
tend to have
large
incomes and
tend to spend
more on
imports.

U
n
i
t
e
d
S
t
a
t
e
s

None of the
above.
D

M
a
n
y

New

We see that
the
Netherlands,
Belgium, and
Ireland trade

o
t
h
e
r
8

countries.

n
e
i
g
h
b
o
r
s

This is
explained by
the gravity
model, since
these are all
large
countries.

o
f

This is
explained by
the gravity
model, since
these are all
small
countries.

t
h
e
U
n
i
t
e
d

This fails to
be consistent
with the
gravity
model since
these are
small
countries.

S
t
a
t
e
s

This fails to
be consistent
with the
gravity
model since
these are
large
countries.

d
o
a
l
o
t
m
o
r
e

None of the
above.
C

t
r
a
d
e

New

The two
9

with the
United States
than
European
economies of
equal size.

C
h
a
n
g
i
n
g

This
contradicts
predictions
from gravity
models.

P
a
t
t
e
r
n

This is
consistent
with
predictions
from gravity
models.

o
f

This is
relevant to
any
inferences
that may be
drawn from
gravity
models.

W
o
r
l
d
T
r
a
d
e

This is
because these
neighboring
countries
have
exceptionally
large GDPs.

S
i
n
c
e

None of the
above.
B

W
o
r
l
d

New

The
10

War II (the
early 1950s),
the
proportion of
most
countries'
production
being used in
some other
country

S
i
n
c
e
W
o
r
l
d

remained
constant.

W
a
r

increased.

I
I
,

decreased.

fluctuated
widely with
no clear
trend.

t
h
e
l
i
k
e
l
i
h
o
o
d

both A and D
above.
B
Previous
Edition

t
h
a
t
f
o
r
e
i
g
n
m
11

arkets would
gain
importance
in the
average
exporters as
a source of
profits

r
e
m
a
i
n
e
d
c
o
n
s
t
a
n
t
.

remained
constant.

increased.

decreased.

fluctuated
widely with
no clear
trend.

i
n
c
r
e
a
s
e
d
.

both A and D
above.
B
Previous
Edition

d
e
c
r
e
a
s
e
d
.

Since World
War II, the
likelihood
that any
single item in
the typical
consumption
basket of a
consumer in
the U.S.
originated
outside of the
U.S.

f
l
u
c
12

tuated
widely with
no clear
trend.

S
i
n
c
e

both A and D
above.

W
o
r
l
d

B
Previous
Edition

W
a
r

Since World
War II, the
likelihood
that the job
of a new
college
graduate will
be directly or
indirectly
affected by
world trade

I
I
,
t
h
e
r
e
l
a
t
i
v
e

remained
constant.

increased.

i
m
p
o
r
t
a
n
c
e

decreased.

fluctuated
widely with
no clear
trend.

both A and D
above.
B

o
f

Previous
Edition

r
a
13

w materials,
including oil,
in total world
trade

i
s
r
e
l
a
t
i
v
e
l
y

remained
constant.

increased.

decreased.

fluctuated
widely with
no clear
trend

s
m
a
l
l
.

both A and D
above.
C

i
s

Previous
Edition

r
e
l
a
t
i
v
e
l
y

In the current
PostIndustrial
economy,
international
trade in
services
(including
banking and
financial
services)

s
t
a
g
n
a
n
t
.

dominates
world trade.

does not
exist.
14

None of the
above.

I
n

C
Previous
Edition

t
h
e
p
r
e
W
o
r
l
d
W
a
r
I
p
e
r
i
o
d
,
t
h
e
U
.
S
.
e
x
p
o
r
t
e
d
15

primarily
t
e
c
h
n
o
l
o
g
y

manufacture
d goods.

services.

primary
products
including
agricultural.

i
n
t
e
n
s
i
v
e

technology
intensive
products.

None of the
above.

p
r
o
d
u
c
t
s
.

C
Previous
Edition

In the preWorld War I

period, the
United
Kingdom
exported
primarily

N
o
n
e

manufacture
d goods.

o
f
t
h
e

services.

primary
products
including
agricultural.

a
b
o
v
16

e.

m
a
n
u
f
a
c
t
u
r
e
d

A
Previous
Edition

In the preWorld War I

period, the
United
Kingdom
imported
primarily

g
o
o
d
s
.

manufacture
d goods.

services.

s
e
r
v
i
c
e
s
.

primary
products
including
agricultural.

technology
intensive
products.

p
r
i
m
a
r
y

None of the
above.
C
Previous
Edition

p
r
o
d
u
c
t
s

10)
In the
present, most
of the exports
from China
are in
17

E
d
i
t
i
o
n

including
agricultural.

technology
intensive
products.

None of the
above.
A
Previous
Edition

11)
Which of the
following
does not
explain the
extent of
trade
between
Ireland and
the U.S.?

Historical
ties

Cultural
Linguistic
ties

Gravity model

Multinational
Corporations

None of the
above.
C
Previous

18

12)

i
n
d
u
s
t
r
i
a
l
e
m
p
l
o
y
m
e
n
t

When
comparing
the
composition
of world
trade in the
early 20th
Century to
the early 21st
Century, we
find major
compositiona
l changes.
These
include a
relative
decline in
agricultural
and primaryproducts
(including
raw
materials).
How would
you explain
this in terms
of broad
historical
development
s during this
period?

c
o
m
p
o
s
i
t
i
o
n
w
a
s

The typical
composition
of world
production
during this
period
experienced
major
changes.
Focusing on
today's
Industrialize
d Countries
(primarily
members of
the OECD),
the

f
o
c
u
s
e
d
p
r
i
m
a
19

rily on
agriculture.
Most value
was in land.
The
predominant
single
consumption
category was
food. Since
then, the
economies
shifted from
the
agricultural
to the
manufacturin
g sectors
(continuing
trends begun
over a
century
earlier in the
industrial
revolution).
Incomes rose,
and
consumption
shifted in
favor of
(increasingly
affordable)
manufactures
. Both income
and price
elasticities
were greater
in
manufactures
than in
agricultural
products. At
the same
time there
was a steady
tendency for
synthetic
(manufacture
d) inputs to
replace
agricultural

b
a
s
e
d
r
a
w
m
a
t
e
r
i
a
l
s
a
n
d
i
n
d
u
s
t
r
i
a
l
i
n
p
u
t
s
.
H
e
n
c
e
,
t
20

rade and of
course
international
trade
conformed to
overall
changes in
patterns of
world
production
and
consumption.

c
o
u
n
t
r
i
e
s
m
u
s
t

Previous
Edition

f
i
r
s
t

13)
In the past
half century,
the
developing
countries have
experienced
major
compositiona
l shifts from
exports of
primary
products
(including
agricultural
and raw
materials) to
exports of
manufactures
. How might
you explain
this in terms
of broad
historical
development
s during this
period?

c
l
a
r
i
f
y
t
h
e
p
r
o
b
l
e
m
o
f
d
e
f
i
n
i
t

Any
discussion of
the export
experience of
the
developing
21

ional
inclusion. In
particular,
the exports of
the (nonOECD)
developing
countries, has
become
increasingly
dominated
by the
experience of
a relatively
small
number of
countries in
South-East
Asia, termed
the New
Industrialized
Countries
(NICs). Since
they
experienced
both very
rapid
increases in
their exports,
and very
rapid
increases in
the
manufacture
d component
of their
exports, their
experience
alone may
explain the
bulk of the
observed
phenomenon
. Many
would
exclude the
NICs from
the
developing
country
category so

a
s
t
o
b
e
a
b
l
e
t
o
f
o
c
u
s
t
h
e
d
i
s
c
u
s
s
i
o
n
o
n
a
m
o
r
e
r
e
p
22

resentative
sample of
(the over 100)
developing
countries.
More
recently, a
second wave
of East Asian
countries,
notably
including
China have
replicated the
experience of
the NICs,
and this
again
muddies the
water for one
interested in
focusing on
the export
experience of
the
increasingly
heterogeneou
s category,
developing
countries.
Another
explanation
of the
growing
dependence
on
manufacture
d exports on
the part of
the
developing
countries is
the
following:
Since the
consumer
( including
industrial
consumer)
markets in
OECD

c
o
u
n
t
r
i
e
s
w
e
r
e
r
a
p
i
d
l
y
s
h
i
f
t
i
n
g
a
w
a
y
f
r
o
m
p
r
i
m
a
r
y
p
23

E
d
i
t
i
o
n

roducts,
these
markets were
rapidly
disappearing
.
In addition,
in the world
markets for
primary
products was
generally
limited by
low price and
especially
income
elasticities;
agricultural
sectors
tended to be
highly and
rigidly
protected in
potential
OECD
markets; and
escalating
effective tariff
structures
levied
systematicall
y large levels
of protection
against the
primary
exports of the
developing
countries;
success in
world
exports had
to be
pursued
outside of the
traditional
primary
exports of
these
countries.
Previous

24

t
e
c
h
n
o
l
o
g
y
"

Do Old
Rules Still
Apply?

The
Neoclassical
HeckscherOhlin model
assumes that
all producers
of any
industrial
product has
knowledge
of, and may
avail itself of
the same
production
technology
available to
producers in
any other
country.
Many have
flagged this
identical
technology
assumption
as an
unrealistic
assumption.
During the
past half
century, the
relative
importance
of the
Multinational
Corporations
(MNCs) in
world trade
has steadily
increased.
How would
this trend
affect the
realism of the
"identical

a
s
s
u
m
p
t
i
o
n
?

N
o
t
i
n
g
t
h
a
t
M
N
C
p
l
a
n
t
s
t
e
n
25

d to use more
labor
intensive
production
processes in
countries
where labor
tends to be
relatively
cheap (both
in "low"
tech , e.g.
Nike, and
"high tech,"
e.g.
Motorola),
one may
argue that
MNCs use
different
technologies
in developing
countries.
However,
this is a gross
misundersta
nding of the
identical
technology
assumption .
It is
axiomatically
obvious that
if the same
MNC is
producing
something in
both labor
abundant
and labor
scarce using
different
processes, it
nevertheless
has
knowledge
(intimate
knowledge in
the case of
proprietary
patented

p
r
o
c
e
s
s
e
s
)
o
f
a
v
a
i
l
a
b
l
e
t
e
c
h
n
o
l
o
g
y
.
T
h
e
f
a
c
t
t
h
a
t
t
26

he MNC may
choose not to
apply the
same degree
of capital
intensity in
environment
s with greatly
different
relative factor
prices in no
way lessens
the fact that
the
HeckscherOhlin
identical
technology
assumption
is
strengthened
due to the
growing
relative
strength of
MNCs in
developing
countries. An
additional
fact that
strengthens
this
argument is
that, as
compared to
the early
1950s, a
growing
proportion of
MNCs are
themselves
based in
developing
countries,
such as
China and
Brazil.

O
n
e
o
f
t
h
e
m
a
j
o
r
p
o
l
i
t
i
c
a
l
d
e
v
e
l
o
p
m
e
n
t
s
o
f
t
h
e

Previous
Edition

p
a
27

st several
decades is
the growing
size and
economic/m
onetary
integration of
the European
Union. What
effect do you
think this
will have on
international
trade
between
countries?

p
r
o
m
o
t
e
i
n
t
e
r
c
o
u
n
t
r
y

The growing
economic
integration
between the
various
countries of
Europe, both
the old and
existing
members of
the European
Union (EU)
and the new
countries
joining it
(including
perhaps
soon,
Turkey),
means that
the barriers
to trade are
steadily
falling in a
region that
has
traditionally
dominated
world trade.
The common
monetary
unit should
in itself go
far to

t
r
a
d
e
w
i
t
h
i
n
t
h
e
g
r
o
w
i
n
g
E
U
(
28

judging by
the positive
historical
effect of a
single
currency in
the U.S.). The
standardizati
on of
transportatio
n (including
railroad
gauges,
highway
signs etc.)
and product
codes will
also promote
expansion of
intra-EU
trade. The
decline in the
probability of
political
conflict
associated
with this
comprehensi
ve economic
union, plus
conscious
attempts to
cooperate in
fiscal and
monetary
policy
stances again
point to
growing
international
trade,
allowing
these
countries to
increasingly
enjoy the
fruits of
potential
positive scale
economies,
and more

t
r
a
d
i
t
i
o
n
a
l
c
l
a
s
s
i
c
a
l
a
n
d
n
e
o
c
l
a
s
s
i
c
a
l
g
a
i
n
s
f
r
o
m
29

trade. The
scale
economies
will also tend
to increase
trade
between the
EU and other
countries.

T
h
e
S
e
r
v
i
c
e
s

Previous
Edition

s
e
c
t
o
r
h
a
s
b
e
e
n
s
t
e
a
d
i
l
y
r
i
s
i
n
g
i
n
r
30

elative
importance
in GDP of the
United
States, as
well as
elsewhere
around the
world. Since
"services"
have been
identified as
"nontradables"
(e.g. it is
difficult to
export
haircuts), it
may be
argued that
this trend
will likely
slow the
rapid growth
in
international
trade.
Discuss.

W
o
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l
d
W
a
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s
.
T
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n
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h
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m
a
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e
d

This
argument
stands on
questionable
logical
foundations.
The past half
century has
seen a steady
growth in the
absolute and
relative
importance
of
international
trade. This
trend has
been
reversed only
by global
conflicts, i.e.
the two

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st despite
major
compositiona
l shifts (e.g.
from primary
to
manufacturin
g), and
location
shifts (e.g.,
the sudden
rise of NICs
as significant
group of
exporters).
The trend
will probably
continue into
the
reasonable
future, fueled
by both
superregional
preferential
trade regions
and a
growing
impact of the
multilateral
forces,
represented
institutionall
y by the
World Trade
Organization
(WTO)-as
illustrated by
the recent
abolishment
of the
epitome
cartelized
trade, the
world trade
in textiles.
Driven by
technologyespecially in
the areas of
communicati

o
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de trend is
not likely in
the near
future. In any
case, many
"services" are
in fact quite
tradable.
Examples
would be
financial
services,
long-distance
teaching,
"help-desk"
outsourcing,
consulting
and
management
services and
others. In
fact, when a
tourist gets a
haircut, we
see that even
haircuts
become a
"tradable"
service.
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