ECON 202 Lecture 2: Chapter 2.1

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lilacmouse857

28 Jun 2018

School

University of Waterloo

Department

Economics

Course

ECON 202

Professor

Fiona T Rahman

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An empirical relationship known as the gravity model helps to make sense of the value of trade

between any pair of countries and also sheds light on the impediments that continue to limit

international trade even in today's global economy

•

Recent decades have been marked by a large increase in the share of world output that is sold

internationally, by a shift in the world's economic center of gravity toward Asia, and by major

changes in the types of goods that make up that trade

•

U.S has 15 major trading partners with Canada being first then China second. •

These countries accounted for 69% of the value of U.S that year•

Who Trades with Whom?

They have the highest values of gross domestic product (GDP), which measures the total

value of all goods and services produced in an economy.

○

Strong empirical relationship between the size of a country's economy and the volume of

both its imports and its exports

○

U.S trades with Germany, UK, and France because these are the three largest European economics•

Size Matters: The Gravity Model

Looking at world trade as a whole, economists have found an equation of the following form

predicts the volume of trade between any two countries

•

A is constant

○

Tij is the value of trade between country I and country J

○

Yi is country I's GDP

○

Yj is country J's GDP○

Dij is the distance between the two countries ○

This equation is known as a gravity model of world trade○

The trade between any two countries is, other things equal, proportional to the product of

their GDPs and diminishes with distance.

○

•

Economists often estimate a somewhat more general gravity model•

Chapter 2

World Trade: An Overview

January 3, 2018 5:35 PM

ECON 231 Page 1

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Document Summary

U. s has 15 major trading partners with canada being first then china second. These countries accounted for 69% of the value of u. s that year. U. s trades with germany, uk, and france because these are the three largest european economics. They have the highest values of gross domestic product (gdp), which measures the total value of all goods and services produced in an economy. Strong empirical relationship between the size of a country"s economy and the volume of both its imports and its exports. Looking at world trade as a whole, economists have found an equation of the following form predicts the volume of trade between any two countries. Tij is the value of trade between country i and country j. Dij is the distance between the two countries. This equation is known as a gravity model of world trade.

Related Questions

Today, in the Unitedâ States, exports are about

28 percent of GDP.

90 percent of GDP.

14 percent of GDP.

4 percent of GDP.

Which of the following statements isâ FALSE?

Sophisticated financial systems have given U.S. productive efficiency a boost.

When it comes to overall productiveâ efficiency, compared toâ Japan, Germany and the rest of the Europeanâ Union, the United States lags far behind.

Economic restructuring and investments in information technology have added to productive efficiency in the United States.

The Unitedâ States' international competitive position has been helped by its long history of widespread entrepreneurship.

One problem with the infant industry argument is that

it fails to protect domestic industries from foreign competition.

it must be approved by the Federal Reserve Board.

it must be approved by the IMF and the World Bank.

the protection is typically neverâ removed, creating a domestic monopoly.

When a tariff isâ imposed, the supply curve for the imported good

shifts upward and to the left.

shifts downward and to the right.

becomes perfectly inelastic.

does not change.

The WTO replaced the GATT in

1900.

1995.

1960.

1945.

The World Trade Organization

increases world trade by providing interest rate subsidies to foreign borrowers who buy U.S. exports on credit.

was established to settle trade disputes within the European Union.

was established to resolve disputes arising under world trade rules.

is another name for the IMF.

Trade deflection is an act that

has no impact on the amount of international trade in the world.

is illegal among all countries in the world.

decreases the amount of international trade in the world.

increases the amount of international trade in the world.

The Number of Worker Days to Produce One Cuckoo Clock or Movie Using All Available Resources
Product	United States â (WorkerminusââDays)	Switzerland â (WorkerminusââDays)
Cuckoo Clocks	8	6
Movies	12	4

Refer to the above table. Assuming constant opportunityâ costs, which of the of the following statements is correct if the rate of exchange is 1 movie for 1 cuckoo clock.

U.S. residents will gain from exporting movies and Swiss residents will gain from exporting cuckoo clocks at a rate of exchange.

U.S. residents would be willing to export cuckooâ clocks, but Swiss residents would not gain from exporting movies at this rate of exchange.

Swiss residents would be willing to exportâ movies, but U.S. residents would not gain from exporting cuckoo clocks at this rate of exchange.

U.S. residents will gain from exporting cuckoo clocks and Swiss residents will gain from exporting movies at a rate of exchange.

The balance of payments is

a summary record of aâ country's purchases and sales of goods and services in the world market.

a summary record of aâ country's economic transactions with foreign residents and governments.

the value of goods and services bought and sold in the world market.

the value of merchandise goods bought and sold in the world market.

indigowildebeest431

31. A country's tax system influences the attractiveness of investing in that country and affects the relative level of profitability for an MNC.

a. True

b. False

32. Points inside a production possibilities frontier represent

a. unattainable production combinations

b. efficiency

c. situations where supply exceeds demand

d. unemployment of resources

33. Firms in a high-wage nation like the U.S. can compete effectively with imports from low-wage nations if

a. the U.S. reduces tariffs on imports

b. low-wage nations impose tariffs on U.S. made goods

c. labor productivity is higher in the low-wage nation

d. labor productivity is higher in the U.S.

34. Assume that production in the United States is valued at $100,000. National income is therefore $100,000. Of their income, workers save $2000, pay $6,000 in taxes, spend $89,000 on consumer goods, and spend $2000 on imports. Businesses spend $5,000 in new investment spending. And, foreigners spend $1000 on exports. To avoid any problems of inflation or unemployment, the government should have a budget deficit or surplus of:

a. $2,000 surplus

b. $1,000 deficit

c. $2,000 deficit

d. $1000 surplus

e. $0 deficit

35. Autarky means-----------------------------------------------------------------

a. the absence of government

b. lack of agriculture

c. self-sufficient, in the absence of international trade

d. short of exchange rates

36. The more people there are----------------------, the less the public as a whole will spend on goods and services.

a. unemployed

b. underemployed

c. employed

d. as discouraged workers

37, Which of the following theories holds that countries will produce and export products that use large amounts of production factors that they have in abundance?

a. Mercantilism

b. The theory of absolute advantage

c. The factor endowment theory

d. None of the above.

38. Suppose that a consumer has a marginal propensity to consume of 0.79. If this consumer earns an extra $1220, her saving would be expected to increase by-----------------------------

39. Many countries in Asia, Africa, and South America-----------------------

a. Are developing countries

b. Are industrialized nations

c. Have a high demand for nonessential products

d. Do not trade

40. Which two of the following are regarded as the main aims of the World Trade Organization (WTO)?

a) To eliminate discrimination in world trade

b) To provide financial assistance to countries with debt

c) To reduce tariff barriers

d) To make infant industry protection illegal

e) To help give preferences to smaller economies

b) and e) a) and c) a) and d) c) and e) b) and d)

41. Last year Sophia's nominal income increased by 12% while the price level rose by 5.5%. Consequently, Sophia's real income:

a. rose by approximately 7%

b. fell by approximately 1%

c. rose by approximately 2%

d. ------------------------------------

42. Consumer surplus

a. is always positive.

b. for a particular unit of consumption is computed by taking the difference between quantity demand and quantity supplied.

c. for all units consumed is the area below demand and below market price over all the units consumed.

d. added to producer surplus provides a measure of the net gain to society from the production and consumption of the good.

43. A decline in Real GDP for six or more consecutive months is called-------------------------------

a. A trough

b. A recession

c. An expansion

d. A recovery

44. What do we call the situation where capital grows faster than the labor force?

a. economic growth

b. technological change

c. productivity growth

d. capital deepening

45. The terms of trade are-------------------------------------------

a. the cost of transportation between countries

b. the ratio of wages in two countries

c. the terms which are used in the trade negotiations

d. the rate at which two products can be exchanged

tealtiger674

Article:

INTRA, Portugal--Leaders of the world's top central banks warned Wednesday that escalating trade conflicts could ricochet through financial markets and hurt the world economy, potentially prolonging the era of ultralow interest rates.

Rising tensions over trade come at an awkward time for major central banks, which have started moving away from easy-money policies introduced since the global financial crisis.

In a moderated discussion in Portugal, the heads of the Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of Australia called for calm and warned that the costs of further escalation could be high.

Global stock markets sagged this week after U.S. President Donald Trump called for a fresh round of tariffs on $200 billion of Chinese goods, upping the ante after he previously approved tariffs on $50 billion of goods.

"It's very worrisome and again, I can't see any positive," said ECB President Mario Draghi, who was hosting the event, Europe's answer to the Fed's annual economic symposium in Jackson Hole, Wyo.

Mr. Draghi warned that disputes over trade have created "considerable uncertainty" for the 19-nation eurozone economy, which has slowed sharply in recent months.

The European Union said Wednesday it would impose tariffs on U.S. goods worth around [euro]2.8 billion ($3.2 billion) in response to American import tariffs on steel and aluminum. But the EU's move is unlikely to discourage the U.S. from a second round of tariffs, possibly targeted at European autos, which would hit exports worth 0.3% of the EU's economic output, said Oliver Rakau, an economist with Oxford Economics in Frankfurt.

In a shift reflecting those concerns, Mr. Draghi warned Tuesday that the bank could delay plans announced only last week to phase out its [euro]2.5 trillion bond-buying program and suggested the timing of a first interest-rate increase could be pushed back.

Jerome Powell, chairman of the Federal Reserve, warned in the discussion that changes in trade policy "could cause us to have to question the outlook." The Fed last week raised short-term interest rates and signaled a quicker pace of interest-rate increases to keep the U.S. economy from overheating.

While the tensions haven't yet dented U.S. economic growth, Mr. Powell said businesses increasingly were expressing concerns to the Fed about how the conflict might affect their plans for investment and hiring.

For Japan, whose central bank maintained its aggressive stimulus policies last week to support a softening economy, the trade conflict is "a matter of great concern," said Bank of Japan Gov. Haruhiko Kuroda.

The indirect impact on Japan's economy could be "quite significant if the escalation between China and the U.S. continues," Mr. Kuroda said, because it could affect the Asian supply chain centered on countries like Japan and Taiwan and across southeast Asia.

While the tariffs themselves might not derail the global economic recovery, the fallout could be magnified by investors through financial markets, said Australia's central bank governor, Philip Lowe.

"I believe what is happening [on trade] is incredibly worrying," Mr. Lowe said. "It wouldn't take that much for financial markets to turn this into a very big global event."

The problem for central banks, in Japan and elsewhere, is that they appear to have little ammunition left to deal with any new economic downturn after years of aggressive stimulus. The value of assets held by the Bank of Japan is set to exceed the nation's annual economic output over the coming months, while the ECB's balance sheet also will continue to grow through the end of this year. Both central banks are still holding short-term interest rates below zero.

Asked how the ECB could respond to any new recession, Mr. Draghi said he didn't expect economic growth to turn negative between now and 2020.

Mr. Powell acknowledged that central banks would have less capacity to fight any new recession because interest rates are already close to zero. The U.S. government also has less scope to increase spending than in the past, though it still has room to react, he said.

"I really hope that this escalation could be rescinded and a normal trading relationship between the U.S. and China would prevail," Mr. Kuroda said.

As there any positive outcomes of rising trade tensions, according to central bankers? . What actions would central banks in theory launch, in theory, to counteract any problems with economic growth in their countries? Why are central banks worried about these policy moves at this point in time?

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ECON 202 Lecture 2: Chapter 2.1

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