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107 views

IETP Tutorial 1 Group 1 PDF

Uploaded by

Puteri Nelissa Milani
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© © All Rights Reserved
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International Economics

Theory and Policy


ECN60704

March 2020
TUTORIAL 1 (WEEK 2)

Lecture 1: The nature of economic policy


formation and implementation:
▪ Introduction
▪ World Trade (An Overview)

Krugman, P.R., Obstfeld, M., and Melitz, M.


(2018), Chapters 1 and 2
© 2013 Pearson Education, Inc. Publishing as Prentice Hall 2 of 41
Question 1 (Refer to Q1 on page 54)

Explain why Canada and South Korea are similar in terms of population
and GDP but differ in trade – the US arguably Canada’s largest trading
partner, whilst Korea divides 60 percent of its exports among China,
ASEAN, the US and the EU.

● According to the Gravity model, the economic sizes and the distance between the two countries
influence the trade flow between any two countries.
● In terms of distance: Canada is next to the US and far from the rest of the world, hence, transportation
costs are low, allowing for more trade between Canada and the US.
● Canada and the US belong to the same FTA – NAFTA, which removes all trade barriers (tariff,
regulations), and hence, further facilitate the bilateral trade flows.
● Distance can also be referred to differences in culture and language, and in the case of the US and
Canada, such distance is small.

KASHVEENI A/P SIVARAJA, MUHAMAD KHAIRUL AZMAN BIN BACHO, KHAYRUL ISLAM ANIK SARKER, KONG YIN JING

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 3 of 41


● For South Korea, it is close to China and ASEAN both geographically and culturally so it has
strong trade ties with the region.
● In terms of size: US is the largest economy in the world and has a great demand for Canada’s
exports and supply for Canada’s imports, hence, the US attracts most of Canada’s trade flow.
● For South Korea, both China and ASEAN as a whole are large economies with great demand and
supply for South Korean products.
● On the other hand, the large economic size of the US and Europe compensate for their
disadvantage in terms of geographical distance to South Korea.
● The increasing investment (FDI) from Korea to the region (China and ASEAN) with an increasing
presence of multinationals from Korea and their supply chains also facilitate more intermediate
goods trade between Korea and the region.
● The basic equation depend upon two major variables: GDP and distance Positive correlation of
trade to GDP and negative correlation with distance ln (Tradeij) = C + a ln(GDPi) + b ln(GDPj) +
+c ln(distanceij) + uij

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 4 of 41


Question 2 (Refer to Q2 on page 55)

The gravity model is often used to not only explain trade between two countries, but also to investigate the reasons why they
don’t. Illustrate this anomaly with suitable examples and reasons.
MUHAMMAD AQIL BIN ZULKARNAIN
JORDAN NANRA
PUTERI NELISSA MILANI BINTI ABDULLAH KAMIL
YONG SHU YAO

Gravity has been one of the most successful empirical models in economics. Incorporating theoretical foundations of gravity into economics
perspective has led has led to a richer and more accurate estimation and interpretation of the spatial relations described by gravity. Anderson
(2011) states that the traditional gravity model drew on analogy based on Newton’s Law of Gravitation, whereby it has been used to estimate flow
of goods and people between nations. In other words gravity model explains in retrospective of international economics predicts bilateral trade
flows based on the economic size/power and distance between the nations. Influence of Gravity Model in International Economics can be seen in
the creation of RTA, OECD, NAFTA, APEC, ASEAN.

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 5 of 41


Factors that encourages trade according to the gravity model :

1) Size
The larger the economy, the more goods and services produced.
→ US vs Australia
2) Distance
→ US and China -v- US and South Korea

Anomalies
3) Cultural affinity
→ Japanese and Korea usually trade with each other
→ semiconductors and semiconductor manufacturing devices, flat panel display
manufacturing devices
4) Geography
→ US and China
→ US and Malaysia
5) Multinational corporations
6) Borders
7) Trade agreements - Tariffs
© 2013 Pearson Education, Inc. Publishing as Prentice Hall 6 of 41
Factors that discourage trade (Anomalies):

● language and or culture barriers (cultural affinity) no common language or culture


● Country with domestic issues
- Sudan (neighbors have civil war),
- North Korea & Malaysia
- Japan and South Korea trade war
● Far distance that incurs high transport costs
● Borders Control (Time taken for items to go through customs & fees incurred)
● Geography / infrastructure (cost of creating tunnels & highways)
● Trade agreement - Tariffs

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 7 of 41


Question 3 (Refer to Q4 on page 55)

Over the past few decades, East Asian economies have


increased their share of world GDP. Similarly,
intra-East-Asian trade-that is trade among East Asian
nations-has grown as a share of world trade. More than
that, East Asian countries do an increasing share of their
trade with each other. Explain why, using the gravity model.

SURESH ASHOK KUMAR


CHAI YUN ZHI
KERK WEI QIN
ANTHONY YAP KHIN CHUNG

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 8 of 41


From the gravity model, one of the enablers to trade is distance, when two
neighbouring countries trade with each other, this allows them to increase
their import and export. Therefore increasing both country GDP.

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 9 of 41


Question 4 (Refer to Q5 on page 55)

A century ago, most British imports came from relatively


distant locations: North America, Latin America, and Asia.
Today, most British imports come from other European
countries. How does this fit in with the changing types of
goods that make up world trade?

OH JING LU
ROBERT GEORGE PROSPER
SHADAB TAJWAR AHMED

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 10 of 41


A century Ago…
North America- Tobacco, Rice
Latin America- Petroleum, raw materials
Asia - Gold and jewels, Cloths made of silk. Cheap labor as well as goods rich in quality.

Now...
Location- Closer which means its easier to trade between countries
Cheaper- Reduction in transportation costs, costs of imports and exports
Culture- Similar culture between countries (ex: language, food)

© 2013 Pearson Education, Inc. Publishing as Prentice Hall 11 of 41


© 2013 Pearson Education, Inc. Publishing as Prentice Hall 12 of 41

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