World Trade An Overview (International Finance)

World Trade An Overview (International Finance)

Before entering into a series of theoretical models that explain why countries trade across borders and the benefits of this trade, this lecture considers the pattern of world trade that we observe today. The core idea of the lecture is the empirical model known as the gravity model. The gravity model is based on the observations that (1) countries tend to trade with nearby economies and (2) trade is proportional to country size. The model is called the gravity model, as it is similar in form to the physics equation that describes the pull of one body on another as proportional to their size and distance.

Learning Objectives of lecture:

1. Describe how the value of trade between any two countries depends on the size of these countries’ economies and explain the reasons for that relationship.
2. Discuss how distance and borders reduce trade.
3. Describe how the share of international production that is traded has fluctuated over time and why there have been two ages of globalization.
4. Explain how the mix of goods and services that are traded internationally has changed over time.

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