International economics World economy: concept and economic dimensions Globalization Gravity model of international trade

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World Economy: introduction; Jan J. Michalek

International economics

World economy: concept and economic dimensions

Globalization

Gravity model of international trade

Introduction

International Trade & the World Economy;  Charles van Marrewijk

International economics distinguishes between:

• International monetary analysis

• International real analysis

International Trade & the World Economy focuses on real analysis.

Chapter 1 The World Economy discusses some key economic concepts, focusing on ‘important’ countries.

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Development of world per capita income over the last 2000 years

World GDP per capita (1990 international $), logarithmic scale

5,709

444 435 667

1820 100

1,000 10,000

0 500 1000 1500 2000

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Land area and population

Table 1.2 Top 15 population (millions), 1999

country size % of world sum %

1 China 1,254 21.0 21

2 India 998 16.7 38

3 USA 278 4.7 42

4 Indonesia 207 3.5 46

5 Brazil 168 2.8 49

6 Russia 146 2.4 51

7 Pakistan 135 2.3 53

8 Bangladesh 128 2.1 55

9 Japan 127 2.1 58

10 Nigeria 124 2.1 60

Income

To measure the value of all goods and services we distinguish:

• GDP = Gross Domestic Product (located in a country)

• GNP = Gross National Product (residents of a country) GDP + net receipts of factor income = GNP

To correct for the large differences in prices between countries (especially for non-traded goods and services) the United Nations International Comparison Project calculates:

• Purchasing Power Parity exchange rates

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Income

0 500 1000 1500 2000 2500

GDP

GNP

Germany

UK, France

Italy China

GNP and GDP

Gross domestic and gross national product, 2008 ($ billion).

The dotted line is a 45º line, the axes use a logarithmic scale, and the circles are proportional to the size of GNI.

GDP and GNI, 2008 (billion current $)

10 100 1,000 10,000 100,000

Gross Domestic Product, GDP

Gross National Income, GNI

USA

China Germany

Japan

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Gross domestic product, 2008; top 15, ranked according to ppp

GDP, 2008; top fifteen countries, ranked according to PPP

992 1,302 1,344 1,443

1,549 1,872

1,978 2,122

2,178 2,260

2,905 3,359

4,358

7,909

14,093

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Turkey Canada S. Korea Spain Mexico Italy Brazil France UK Russia Germany India Japan China USA

GDP; PPP GDP; current $

GDP per capita in EU (2005)

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Exports and imports of goods and services, 2008 ($ billion)

The dotted line is a 45º line, the axes use a logarithmic scale, and the circles are proportional to the size of exports.

Exports and imports of goods and services, 2008 ($ bn)

1 10 100 1,000 10,000

export value

import value

USA

Germany China

Russia Saudi Arabia

Ethiopia

Brunei

Zmiany w handlu światowym 1947-2008

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Rank Expor ter s Value Shar e Annual per centage

change Rank Impor ter s Value Shar e

Annual per centage

change

1 China 2209 11,7 8 1 United States 2329 12,3 0

2 United States 1580 8,4 2 2 China 1950 10,3 7

3 Germany 1453 7,7 3 3 Germany 1189 6,3 2

4 Japan 715 3,8 -10 4 Japan 833 4,4 -6

5 Netherlands 672 3,6 3 5 France 681 3,6 1

6 France 580 3,1 2 6 United Kingdom 655 3,5 -5

7 Korea, Republic of 560 3,0 2 7 Hong Kong, China 622 3,3 12

8 United Kingdom 542 2,9 15 retained imports 141 0,7 4

9 Hong Kong, China 536 2,8 9 8 Netherlands 590 3,1 0

domestic ex ports 20 0,1 -11 9 Korea, Republic of 516 2,7 -1

re-ex ports 516 2,7 10

10 Russian Federation 523 2,8 -1 10 Italy 477 2,5 -2

11 Italy 518 2,8 3 11 Canada a 474 2,5 0

12 Belgium 469 2,5 5 12 India 466 2,5 -5

13 Canada 458 2,4 1 13 Belgium 451 2,4 3

14 Singapore 410 2,2 0 14 Mex ico 391 2,1 3

domestic ex ports 219 1,2 -4 15 Singapore 373 2,0 -2

re-ex ports 191 1,0 6 retained imports 182 1,0 -9

15 Mex ico 380 2,0 3

Leading marchandise exporters and importers in 2013

Rank Expor ter s Value Shar e Annual per centage

change Rank Impor ter s Value Shar e Annual per centage

change

16 United Arab Emirates b379 2,0 9 16 Russian Federation a343 1,8 2

17 Saudi Arabia, Kingdom of 376 2,0 -3 17 Spain 339 1,8 0

18 Spain 317 1,7 7 18 Chinese Taipei 270 1,4 0

19 India 313 1,7 6 19 Turkey 252 1,3 6

20 Chinese Taipei 305 1,6 1 20 United Arab Emirates b251 1,3 11

21 Australia 253 1,3 -1 21 Thailand 251 1,3 0

22 Brazil 242 1,3 0 22 Brazil 250 1,3 7

23 Switzerland 229 1,2 1 23 Australia 242 1,3 -7

24 Thailand 229 1,2 0 24 Malaysia 206 1,1 5

25 Malaysia 228 1,2 0 25 Poland 205 1,1 3

26 Poland 202 1,1 9 26 Switzerland 201 1,1 2

27 Indonesia 183 1,0 -3 27 Indonesia 187 1,0 -2

28 Austria 175 0,9 5 28 Austria 182 1,0 2

29 Sweden 168 0,9 -3 29 Saudi Arabia, Kingdom of 168 0,9 8

30 Czech Republic 162 0,9 3 30 Sweden 160 0,8 -3

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Leading exporters and importers of other commercial services, 2013

2013 2005 2013 2005-13 2011 2012 2013

Ex porters

European Union (28) 1200,8 50,3 47,1 9 14 -1 7

Ex tra-EU (28) ex ports 568,6 ... 22,3 ... 14 1 7

United States 403,0 16,5 15,8 9 10 4 4

China 115,5 2,4 4,5 19 13 11 14

India 113,6 3,1 4,5 14 15 10 7

Japan 90,7 4,8 3,6 5 8 -6 3

Switzerland 70,5 2,8 2,8 9 14 -4 6

Hong Kong, China 63,4 2,7 2,5 8 9 4 5

Korea, Republic of 60,8 1,5 2,4 16 20 24 10

Singapore a 58,9 ... 2,3 ... 19 12 8

Canada 48,0 2,5 1,9 6 11 -3 -1

Russian Federation 32,2 0,8 1,3 16 24 10 13

Chinese Taipei 28,6 1,2 1,1 9 15 9 6

Brazil 25,3 0,6 1,0 16 24 8 -3

Israel 20,9 0,7 0,8 11 16 16 7

Norway 19,3 0,8 0,8 8 2 4 -5

Above 15 2350,0 93,2 92,2 - - - -

Importers

European Union (28) 908,1 50,2 43,5 7 11 -1 6

Ex tra-EU (28) imports 370,3 ... 17,8 ... 12 -1 5

United States 239,9 11,4 11,5 9 7 3 2

China 106,5 3,2 5,1 16 13 10 15

Japan 93,4 5,2 4,5 7 10 3 2

Singapore 67,0 ... 3,2 ... 15 8 4

Korea, Republic of 55,6 2,2 2,7 11 9 7 3

Russian Federation 52,1 1,5 2,5 17 19 15 16

India 49,2 1,9 2,4 12 5 7 -2

Canada 47,3 3,1 2,3 5 7 -2 -1

Brazil 43,0 1,2 2,1 17 18 10 4

Switzerland 32,9 1,1 1,6 15 28 5 16

Norway 22,1 0,9 1,1 12 28 2 1

Hong Kong, China 21,5 1,0 1,0 10 7 5 2

Thailand 19,9 0,8 1,0 11 17 -9 12

Australia 19,6 0,8 0,9 12 21 5 6

Above 15 1780,0 86,7 85,3 - - - -

Annual per centage change

Value Shar e

Intra- and Inter-regional merchandise trade flows (% of world total)

Merchandise trade export by region, 2008 (% of total)

0.3 0.9 1.0 0.8

6.5

13.9

29.9

3.5 3.8 4.5

6.5

13.0

27.7

41.0

0 10 20 30 40

AFR SCA CIS mEAST NAM ASIA EUR

total intra-region

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Exports and Imports as Percentages of National Income in 1994

Trade openness in major countries

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Relative exports of goods and services, 2008 (% of GDP)

88 90 91 92 97

110 131

179

212 234

0 50 100 150 200 250

Malta Macao United Arab Emirates Belgium Bahrain Malaysia Seychelles Luxembourg Hong Kong Singapore

Taxes on international trade, 2008 (% of government revenue)

Taxes on international trade, 2008 (% of revenue)

25 26

27 32 32

35 35

44

52 57

0 10 20 30 40 50 60

Russian Federation Niger Bangladesh St. Kitts and Nevis Maldives Madagascar Cote d'Ivoire Namibia Bahamas, The Lesotho

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Dynamics and globalization

 0

 capital account balance balance

account current

outflow capital

net account

current

surplus 

-8 0 8

1970 1980 1990 2000

Australia Netherlands

Current account surplus (% of GDP)

indicator of accumulation of financial claims on the Rest Of the World (ROW).

Global imbalances; current account balance (US $ bn), 1970-2009

Current account balance; selected countries / regions (US $ bn), 1970-2009

-161

-803 436

-900 -750 -600 -450 -300 -150 0 150 300 450

1970 1975 1980 1985 1990 1995 2000 2005 2010

USA China

Japan

Arab world

EU

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0 100 200 300 400 500

1960 1970 1980 1990 2000

index (1960 = 100)

population GDP

World GDP increases faster than world population

0 5 10 15 20 25 30

1960 1970 1980 1990 2000

world exports (% GDP)

World exports increase faster than world GDP

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Figure 1.8 Two waves of globalization in trade

Merchandise exports, % of GDP in 1990 prices

4.6

17.2

2.5

10.1

0.2

13.4

0 5 10 15

1870 1900 1930 1960 1990

world USA Japan

Foreign capital stocks; assets / world GDP

0.6

0.4

0.2

0

1860 1880 1900 1920 1940 1960 1980 2000

Foreign capital stocks; assets / world GDP 0.6

0.4

0.2

0

1860 1880 1900 1920 1940 1960 1980 2000

Foreign capital stocks; assets / world GDP

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Trade connections in the world economy

Exports in direction closed arrow (Exports in direction open arrow) South

Asia

Latin America

Sub-Sahara Africa

Middle East &

North Africa

Austral Asia North

America

East Asia

& Pacific West

Europe

East Europe

& C. Asia 28

6

1

1 1

4

1 (2) 1 (2)

4 (5) 2 (3)

3 (3) 3 (4)

1 (1)

1

1 (1) 1 (1)

3 (4)

3 (3) (1)

Intra-regional exports

Size Matters: The Gravity Model (cont.)

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The Gravity Model

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.

The Gravity Model (cont.)

• In its basic form, the gravity model assumes that only size and distance are important for trade in the following way:

T_ij = A x Y_i x Y_j /D_ij

• where

Tij is the value of trade between country i and country j A is a constant

Y_i the GDP of country i Y_j is the GDP of country j

D_ij is the distance between country i and country j

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The Gravity Model (cont.)

• In a slightly more general form, the gravity model that is commonly estimated is

T_ij = A x Y_i^a x Y_j^b /D_ij^c where a, b, and c are allowed to differ from 1.

• Perhaps surprisingly, the gravity model works fairly well in predicting actual trade flows, as the figure above representing US–EU trade flows suggested.

Distance and Borders (cont.)

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Global Economic Crisis: real world trade flows (index), 1970-2011

Real world trade flows; constant 2000 US dollar, index (2000 = 100)

0 40 80 120 160

1970 1975 1980 1985 1990 1995 2000 2005 2010

annual data

monthly data 2

1 3 4

Global Economic Crisis

2.8%

decline

0.3%

decline

7.4%

decline

20.0%

decline

Trade volumes and the Global Economic Crisis; selected areas, 2004-2011

a. Import volume advanced economies 5-month moving av. (ind indices; pre-2009 peak=100)

60 80 100 120

2004 2005 2006 2007 2008 2009 2010 2011

2007-2

USA Euro area

2008-3 2008-10

Japan

b. Import volume emerging markets 5-month moving av. (ind indices; pre-2009 peak=100)

60 80 100 120

2004 2005 2006 2007 2008 2009 2010 2011 Asia

Africa + Middle East

Latin America

Central + East Europe

2008-3 2008-8

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Trade volumes and the Global Economic Crisis; selected areas, 2004-2011

c. Export volume advanced economies 5-month moving av. (ind indices; pre-2009 peak=100)

60 80 100 120

2004 2005 2006 2007 2008 2009 2010 2011 USA Euro area

2008-3 2008-6 Japan

d. Export volume emerging markets 5-month moving av. (ind indices; pre-2009 peak=100)

60 80 100 120

2004 2005 2006 2007 2008 2009 2010 2011 Asia

Africa + Middle East

Latin America

Central + East Europe

2008-2 2008-9

Extent, duration, and speed of trade volume decline during GEC

b. Extent, duration, and speed of exort volume decline during GEC

0 5 10 15 20 25 30 35 40

USA Japan Euro area Asia C&E Europe

Latin America

Africa & M extent duration speed East