Chapter 2: World Trade

What does the gravity model of trade suggest?

Trade volume increases with economic size and decreases with distance.

What additional factors influence trade volume?

Culture, geography, borders, language, multinational corporations, RTAs

What is the basic gravity equation for trade?

T_i,j=A*(Y_iY_j/D_ij)

How do trade agreements influence trade?

They increase trade flows beyond what gravity predicts (e.g., NAFTA)

What are the main components of world trade today?

Manufactured goods (53%), services (22%), fuels/mining (17%), agriculture (8%)

How has globalization evolved over time?

Increased post-1945, accelerated after 1970, challenged by crises like COVID-19

What is the role of outsourcing and offshoring?

Firms relocate production to take advantage of cost differences

Why does distance still matter in trade despite globalization?

Transport costs, cultural/language differences, and border frictions remain

What were the waves of globalization?

1.⁠ ⁠1840–1914: steam power, railroads

2.⁠ ⁠Post-WWII: planes, internet, telecommunication

3.⁠ ⁠Post-1970: rise of global supply chains