Global Trade:1

1. Global Trade:1

2. Global Trade: Lessons

3. Texts Main Text: Required: • International Economics: Theory & Policy, Krugman, P.R., and Obstfeld, M., 8th Edition, Pearson-Addison-Wesley. Recommended: • International Economics, Husted, S., and Melvin, M., 8th Edition, Addison-Wesley. • International Economics, Gerber, J., 5th Edition, Addison-Wesley. • World Trade and Payments: An Introduction, Caves, R.E., Frankel, J.A., and Jones, R.W., 10th Edition, Pearson-Addison-Wesley. • The World Economy: International Trade, Yarbrough, B.V., and Yarbrough, R.M., 7th Edition, Thomson-South-Western. • Principles of Microeconomics, Only Chapter 3: Interdependence and the Gains from Trade, Mankiw, N.G., 5th Ed., South-Western Cengage Learning.

4. Lesson 1 • Lesson 1: The World Economy and Global Trade • Procedure: The PowerPoint Presentation • Duration: 60 minutes • Overview This lesson provides us with an overview of global trade: transactions of merchandise in the form of exports and imports, the place of trade in international economics and the balance of payments, the composition and dynamics of trade, the link between globalization and trade.

5. Lesson 1 (cont.) • Outline • List of Class needs: the text, a computer, and a notebook. • Pre-class reading and preparation: Chapter 1 and 2 of the text. • Activities and timing: Go over the entire presentation in 60 minutes and think about the main findings of the lesson. • Identification of Learning Objectives: Objective #1 from Section I • Identification of the Global Workforce Skills for the lesson: Skill points 1 and 2 from Section II • Lesson notes and suggestions for Instructors: Read the relevant chapters in the recommended texts and look for online data for the latest figures of global trade. Acknowledgment: The Course Developer took help of different sources as referred while preparing the study materials. When a considerable number of diagrams have been developed to enhance interest in the subject, many diagrams come from the required text for the convenience of the students.

6. Where does Global Trade fit? International trade means global trade that comprises exports and imports of merchandise.

7. Global Trade • Unique among the concerns of economics, international trade has always carried a note of romance – the lure of the exotic, the hint of danger. Traders’ dreams of bartering for the riches of the Orient spurred the European voyages of discovery that began in the 15th century. - Caves, Frankel, & Jones 2007

8. Trade’s place in balance of payments

9. Dynamics of U.S. trade balance Source: U.S. Bureau of Economic Analysis Trade balance = net exports <0 since the mid 1970s

10. Global trade: Facts • In 2007, the world as a whole produced goods and services worth about $50 trillion at current prices. Of this total, more than 30 percent was sold across national borders: World trade in goods and services exceeded $16 trillion (Krugman and Obstfeld). • Thus, the amount of world trade in 2007 exceeded that of U.S. Gross Domestic Product (GDP), which was close to $15 trillion. • GDP measures the total value of all goods and services produced in an economy.

11. Global trade: Facts (cont.) • Between 1960 and 1995 real world output grew by 3.8 percent annually while real world trade grew by 6.1 percent. • While world exports of goods (nominal value) grew at a rate of 5.8 percent annually from 1980 to 1990, world exports of services grew 8.2 percent annually. • The developed countries, which in 1998 accounted for two thirds of world exports, trade extensively with each other. The developing countries ship the bulk of their exports to the developed nations but sell a fast-growing share of these goods to each other. - Caves, Frankel, & Jones 2007

12. Trade in the output equation Trade enters the output equation as net exports (exports – imports) • Y = C + I + G + X – M where • Y = output or GDP • C = consumption • I = investment • G = government spending • X = exports • M = imports • Thus, a country’s income increases as long as its exports grow faster than its imports (e.g. China) all other things remaining the same.

13. Index of openness • The index of openness measures the degree of a country’s orientation to the external world. It is sometimes uses as a measure of a country’s level of globalization. There are various measures of the index of openness such as: • Openness = (exports + imports)/GDP • Openness = exports/GDP • Openness = imports/GDP • Openness = exports + imports • Hence, understanding global trade has been an important aspect at this age of globalization.

14. Waves of globalization • International trade is the fundamental force towards further globalization. Thus, greater the global trade greater the level of globalization. • The development of globalization has never been smooth or continuous. Economists consider two waves of globalization: one in the pre-World War I period, and the other began since the mid 1970s. Thus, globalization was punctuated by four events/factors: 1) World War I 2) Great Depression of the 1930s 3) World War II 4) Protectionism

15. Waves of globalization: An example Source: Richard E. Baldwin and Phillipe Martin, “Two Waves of Globalization: Superficial Similarities, Fundamental Differences,” in Horst Siebert, ed., Globalization and Labor (Tubingen: Mohr, 1999).

16. Trade share can vary across countries Source: Organization for Economic Cooperation and Development Note: the lower trade share of the U.S. should be judged with caution. Inter-state transactions of merchandise in this largest economy are not counted in this calculation.

17. Composition of world trade in 2005 Source: World Trade Organization (WTO)

18. Changing composition of world trade of developing-country exports Source: United Nations Council on Trade and Development Over the past 40 years, the exports of developing countries have shifted toward manufactures. More than 90 percent of the exports of China, the largest developing economy and a rapidly growing force in world trade, consists of manufactured goods.

19. Who trades with whom? • Total U.S. Trade with major partners in 2006 • As the figure shows, the size of GDP and distance matter to determine U.S. trade. Source: U.S. Department of Commerce

20. Trade Facts • A 1% increase in the distance between countries is associated with a decrease in the volume of trade of 0.7% to 1%. • Between 1920 and 1990 average ocean freight and port charges for U.S. import and export cargo fell almost 70 percent. Between 1930 and 1990 average air-transport fares per passenger mile fell by 84 percent, and the cost of a 3-minutes telephone call between New York and London plummeted 98.6 percent (U.S. Council of Economic Advisors, Economic Report of the President, 1997).

21. Trade Facts (cont.) • History has shown that political factors, such as wars, can change trade patterns much more than innovations in transportation and communication. • The got smaller between 1840 and 1914, but it go bigger again for much of the 20th century due to politics, wars, and depression. • Cultural affinity: if two countries have cultural ties, it is likely that they also have strong economic ties. • Geography: ocean harbors and a lack of mountain barriers make transportation and trade easier.

22. Summary points • International economics and global trade • The place of trade in the balance of payments • The place of trade in the output equation • Stylized facts of global trade • Index of openness • Waves of globalization

23. Activity/Homework • Collect the time series data on exports and imports of China. Plot them in Excel and answer to the following questions: • What does the Chinese trade pattern exhibit? • How is the Chinese trade balance (exports – imports) different from the American one?