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Global Trade:1
Global Trade: Lessons
Lessons
Topics
Lesson 1
The World Economy and Global Trade:
An Overview and Stylized Facts on Global Trade
Lesson 2
Lesson 3
Lesson 4
Lesson 5
Lesson 6
Theories of International Trade-I:
The Ricardian Model:
Labor Productivity and Comparative Advantage:
Theories of International Trade-II:
The Heckscher-Ohlin Model:
Factor Endowments and Comparative Advantage
Theories of International Trade-III:
The Standard Trade Model and Gains from Trade
Combination of Labor Productivity and Factor Endowments
Policy Instruments of International Trade:
Tariffs, Export Subsidies, Import Quotas, Export Restraints
Policy Issues of International Trade:
1) Free Trade vs. Protectionism
2) Liberalization in Developing Countries
3) The Role of the World Trade Organization
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Texts
Main Text: Required:
1. International Economics: Theory & Policy, Krugman, P.R., and Obstfeld, M.,
8th Edition, Pearson-Addison-Wesley.
Recommended:
1.
International Economics, Husted, S., and Melvin, M., 8th Edition, AddisonWesley.
2.
International Economics, Gerber, J., 5th Edition, Addison-Wesley.
3.
World Trade and Payments: An Introduction, Caves, R.E., Frankel, J.A., and
Jones, R.W., 10th Edition, Pearson-Addison-Wesley.
4.
The World Economy: International Trade, Yarbrough, B.V., and Yarbrough,
R.M., 7th Edition, Thomson-South-Western.
5.
Principles of Microeconomics, Only Chapter 3: Interdependence and the
Gains from Trade, Mankiw, N.G., 5th Ed., South-Western Cengage Learning.
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Lesson 1

Lesson 1: The World Economy and Global Trade
Procedure: The PowerPoint Presentation
Duration: 60 minutes
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Overview
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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.
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Lesson 1 (cont.)
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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.
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Where does Global Trade fit?
International
Economics
International Trade:
International Money:
Real Transactions
Financial Transactions
International trade means global trade that comprises
exports and imports of merchandise.
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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
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Trade’s place in balance of payments
Balance of
Payments
Balance of
Current Accounts
Balance of Trade:
Net Exports =
Exports - Imports
Balance of
Capital Account
Balance of
Services
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Dynamics of U.S. trade balance
Source: U.S. Bureau of Economic Analysis
Trade balance = net exports <0 since the mid 1970s
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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).
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Thus, the amount of world trade in 2007 exceeded that of
U.S. Gross Domestic Product (GDP), which was close to $15
trillion.
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GDP measures the total value of all goods and services
produced in an economy.
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Global trade: Facts (cont.)
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Between 1960 and 1995 real world output grew by 3.8
percent annually while real world trade grew by 6.1
percent.
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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.
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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
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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.
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Index of openness
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1.
2.
3.
4.
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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.
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Waves of globalization
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International trade is the fundamental force towards
further globalization. Thus, greater the global trade greater
the level of globalization.
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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
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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).
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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.
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Composition of world trade in 2005
Source: World Trade Organization (WTO)
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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.
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Who trades with whom?
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Total U.S. Trade with major partners in 2006
Source: U.S. Department of Commerce
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As the figure shows, the size of GDP and distance matter to
determine U.S. trade.
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Trade Facts
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A 1% increase in the distance between countries is
associated with a decrease in the volume of trade of 0.7%
to 1%.
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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).
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Trade Facts (cont.)
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History has shown that political factors, such as wars, can
change trade patterns much more than innovations in
transportation and communication.
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The got smaller between 1840 and 1914, but it go bigger
again for much of the 20th century due to politics, wars, and
depression.
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Cultural affinity: if two countries have cultural ties, it is
likely that they also have strong economic ties.
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Geography: ocean harbors and a lack of mountain barriers
make transportation and trade easier.
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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
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Activity/Homework

Collect the time series data on exports and imports of
China. Plot them in Excel and answer to the following
questions:
1.
What does the Chinese trade pattern exhibit?
2.
How is the Chinese trade balance (exports – imports)
different from the American one?
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