ECON3116 International Trade
International Trade
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: zz-x2580
ECON3116
International Trade:
Theory & Policy
Van Pham | ECON3116 International Trade Theory and Policy
Introduction
Plan of the lecture:
• What is international trade about?
• Australia’s trade at a glance
• Explaining patterns of trade
• The gravity model
• Gains from trade
• The effects of government policies on trade
• Trade organizations and agreements
1-1
Objective:
• Provide an overview of what International Trade is all about.
• Give you a feel for what is to come later in the course.
Van Pham | ECON3116 International Trade Theory and Policy
1-2
What is international trade about?
There is a growing importance of trade in the world. Global trade grew faster
than GDP in recent decades.
100
200
300
400
500
600
700
Trade GDP
World GDP and Global Trade 1990 – 2022 (1990 = 100)
Source: World Bank National account data and WTO Evolution of Trade =
1
2
( + )
Van Pham | ECON3116 International Trade Theory and Policy
1-3
• There was a considerable increase in the ratio of trade to GDP between 1890 and
1913. This trend was ended by World War I and the Great Depression.
• Trade to GDP ratio in most of the industrial countries grew faster during 1970s and
especially from 1990s with the establishment of the WTO.
What is international trade about?
Trade in Goods and Services Relative to GDP
Van Pham | ECON3116 International Trade Theory and Policy
• International economics is about how nations interact through trade of
goods and services, through flows of money and through investment.
• International trade is an old subject, but it continues to grow in
importance as countries become more closely linked through trade in
goods and services, and through investment than ever before.
1-4
What is international trade about?
Van Pham | ECON3116 International Trade Theory and Policy
1-5
What is international trade about?
Many products source many components
from many countries.
Van Pham | ECON3116 International Trade Theory and Policy
1-6
• Trade in goods: Qantas buys Boeing 787 from the U.S, Boeing buys wing
parts from firms in Japan and Korea.
• Trade in services: airline travel, insurance, maintenance & repairs, tourism.
• Offshoring: Boeing sets up a factory in Melbourne, Australia.
What is international trade about?
Van Pham | ECON3116 International Trade Theory and Policy
1-7
Mode 1: Cross Border Supply – only the
service crosses the border through the use
of telecommunications. Examples:
consultancies, distance training.
Mode 2: Consumption Abroad – only the
consumer crosses the border to consume
the services. Examples: tourists, oversea
students attending Australian universities.
What is international trade about? - Trade in Services
100
120
140
160
180
200
2010 2012 2014 2016 2018 2020 2022
Merchandise trade
Services trade
Mode 3: Commercial Presence - the supplier crosses the border by establishing a
commercial presence. Examples: branch offices overseas by banks, hotels.
Mode 4: Movement of Natural Persons – the supplier crosses the border
temporarily to deliver services. Examples: a consultant travelling to provide services.
Trade in Goods and Services (2010 =100)
20-25% of Total Trade
75-80% of Total Trade
Source: https://stats.wto.org/
Van Pham | ECON3116 International Trade Theory and Policy
International Trade Versus International Finance
• International trade focuses on transactions of real goods and services across
nations.
– These transactions usually involve a physical movement of goods or a
commitment of tangible resources like labor services.
• International finance focuses on financial or monetary transactions across
nations.
– For example, purchases of US dollars or financial assets by Europeans.
1-8
Van Pham | ECON3116 International Trade Theory and Policy
Australia's Trade at a Glance
1-9
0
30
60
90
120
150
0
30
60
90
120
150
Exports Imports
International trade is even more important to many other countries than it is
to Australia
% of GDP % of GDP
EX: 27%
IM: 21%
EX: 34%
IM: 35%
Export and Import as percentages of GDP in 2022
Source: OECD (2024), Trade in goods and services (indicator)
Van Pham | ECON3116 International Trade Theory and Policy
1-10
Australia’s Exports and Imports value during 2001-2023
0
100
200
300
400
500
600
700
800
A$ billion
Exports
Imports
Source: ABS catalogues 5368.0
• International trade has become
increasingly important in the
Australian economy.
• In 2022-23, Australia exports
$685 billion and imports
$547 billion value of goods and
services.
• Australia is the 22nd largest
trade partner in the world and
account for 1.4% of the world
trade flow (as of 2019-20).
Australia's Trade at a Glance
GFC COVID-19
Van Pham | ECON3116 International Trade Theory and Policy
1-11
Exports, Imports and Trade Balance as percentages of GDP (1959 – 2021)
Australia's Trade at a Glance
Source: ABS, Australian National Accounts: National Income, Expenditure and Product, 2021
Trade deficit
Trade surplus
Van Pham | ECON3116 International Trade Theory and Policy
1-12
35.3%
11.8%
5.8%
5.8%
4.4%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
China
Japan
Korea
US
UK
21%
13.4%
5.8%
4.2%
4.1%
0%5%10%15%20%25%
China
US
Japan
Germany
Thailand
Australia's Trade at a Glance
Australia’s top trade partners 2019-20
Source: DFAT Trade and Investment at a glance 2021
Top export markets Top import markets
Van Pham | ECON3116 International Trade Theory and Policy
1-13
Australia’s trade pattern by country has changed over time.
Australia's Trade at a Glance
29%
2019-20
9%
4.5%
13%
Asia: 65%
Australian exports by regionAustralia’s two-way trade by region
Van Pham | ECON3116 International Trade Theory and Policy
1-14
Australia's Trade at a Glance
Exports by sector 2019-20 Imports by sector 2019-20
Source: DFAT Trade and Investment at a glance 2021
Van Pham | ECON3116 International Trade Theory and Policy
1-15
Sources: DISER, Resources and Energy Quarterly, 2022, DAWE, Agricultural Commodities, 2022, ABS, International Trade in Goods and Services, 2022.
Australia's Trade at a Glance
Australia’s export structure has changed overtime.
50%
18%
11%
8%
14%
Van Pham | ECON3116 International Trade Theory and Policy
8.4%
5.5%
4.8%
3.8%
2.6%
2.6%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
Personal travel
Refined petroleum
Passenger vehicles
Telecom equipment
Computers
Freight services
21.6%
11.5%
10.0%
8.3%
5.1%
3.4%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Iron ores
Coal
Natural gas
Edu-related travel
Gold
Personal travel
1-16
Australia's Trade at a Glance
Australia’s top export and import products 2019-20
Source: DFAT Trade and Investment at a glance 2021
Van Pham | ECON3116 International Trade Theory and Policy
Source: UN Comtrade database 2018
1-17
• 1st global exporter of iron ore and coal
• 2nd largest exporter of aluminium ores, unwrought lead
and zinc ores
• 3rd largest exporter of copper ores (by value)
• 2nd largest exporter of beef
• 3rd largest exporter of lentil
• 4th largest exporter of sugar
• 4th largest exporter of wine (by value)
Australia's Trade at a Glance
Van Pham | ECON3116 International Trade Theory and Policy
1-18
• Differences in climate and resources can explain the trade pattern of
several goods, e.g., why Brazil exports coffee and Australia exports iron ore.
• In manufacturing and services, the effect of climate and resources on the
pattern of trade is subtle.
• Differences in labor productivity may explain why some countries export
certain products, e.g., why Japan exports automobiles, and the US exports
aircraft?
• Differences in relative supplies of capital, labor and land used in the
production of different goods and services may also be an explanation,
e.g., why some countries export labor-intensive products and others export
capital-intensive products.
Patterns of Trade - Who sells what to whom?
Van Pham | ECON3116 International Trade Theory and Policy
1-19
There are two types of trade:
• Inter-industry trade depends on differences across countries (as per
previous slide).
• Intra-industry trade depends on market size and occurs among similar
countries.
– E.g. the U.S both exports and imports vehicles in large amount;
– E.g. Australia both exports and import wine
Intra-industry trade can be
• Trade in Horizontally Differentiated Goods.
• Trade in Vertically Differentiated Goods.
Patterns of Trade - Who sells what to whom?
Van Pham | ECON3116 International Trade Theory and Policy
1-20
Patterns of Trade - The Gravity Model
Van Pham | ECON3116 International Trade Theory and Policy
1-21
• Trade with APEC countries accounts for 75% trade volume of Australia.
• The 5 largest trading partners with Australia in 2020 were China (29%),
ASEAN countries (14%), Japan (11%), U.S (10%), and Korea Rep. (5%)
• Gravity model: Determinants of trade patterns
– influence of an economy’s size on trade
– distance and other factors that influence trade
1-21
The Gravity Model - Motivation
Van Pham | ECON3116 International Trade Theory and Policy
1-22
Size matters
The size of an economy is directly related to the volume of imports and exports.
• Larger economies produce more goods and services, so they have more to
sell in the export market.
• Larger economies generate more income from the goods and services sold,
so people are able to buy more imports.
The Gravity Model - Motivation
Van Pham | ECON3116 International Trade Theory and Policy
1-23
Other things besides size matter for trade:
• Distance between markets influences transportation costs and therefore the
cost of imports and exports.
• Cultural affinity: if two countries have cultural ties or common language, it is
likely that they also have strong economic ties.
• Geography: ocean harbors and a lack of mountain barriers make
transportation and trade easier.
The Gravity Model - Motivation
Van Pham | ECON3116 International Trade Theory and Policy
1-24
• Multinational corporations: corporations spread across different nations
import and export many goods between their divisions.
• Borders: crossing borders involves formalities that take time and perhaps
monetary costs like tariffs.
• These implicit and explicit costs reduce trade.
• The existence of borders may also indicate the existence of different
languages or different currencies, either of which may impede trade more.
The Gravity Model - Motivation
Van Pham | ECON3116 International Trade Theory and Policy
1-25
In its basic form, the gravity model assumes that only size and distance
are important for trade in the following way:
=
∗ ∗
where
is the value of trade between country i and country j
A is a constant
is the GDP of country i
is the GDP of country j
is the distance between country i and country j
The Gravity Model - Specification
Van Pham | ECON3116 International Trade Theory and Policy
1-26
In a slightly more general form, the gravity model that is commonly estimated is
=
∗
∗
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.
The Gravity Model - Specification
Van Pham | ECON3116 International Trade Theory and Policy
Estimated gravity equation can be expressed as
ln = ln + ln + ln − ln +
which can be estimated using data via ordinary least squares regression.
The gravity model predict that a 1% increase in the distance between
countries is associated with a decrease in the volume of trade of 0.7% to 1%.
The Gravity Model - Specification
Van Pham | ECON3116 International Trade Theory and Policy
1-28
The Gravity Model – Empirical Evidence
The size of European economies
and the value of their trade with the
United States
Source: U.S Department of Commerce,
European Commission
Van Pham | ECON3116 International Trade Theory and Policy
1-29
Economic size and Trade with the
United States
Source: U.S Department of Commerce,
European Commission
The United States does markedly more
trade with its neighbours than it does
with European economies of the same
size.
The Gravity Model – Empirical Evidence
Van Pham | ECON3116 International Trade Theory and Policy
1-30
• Distance and borders increase the cost and time needed to trade.
• The negative effect of distance on trade is significant, but it has grown
smaller over time due to modern transportation and communication.
• Trade agreements between countries are intended to reduce the formalities
and tariffs needed to cross borders, and therefore to increase trade.
• The gravity model can be used to assess the effect of trade agreements on
trade given GDPs and distances from one another of trading partners.
The Gravity Model – Distance and Borders
Van Pham | ECON3116 International Trade Theory and Policy
1-31
Gains from Trade - Issues
• Is international trade good or bad?
• to a country
• to firms in an industry
• to consumers
• to workers
Van Pham | ECON3116 International Trade Theory and Policy
Gains from Trade - International trade in headlines
1-32
Van Pham | ECON3116 International Trade Theory and Policy
Gains from Trade – Reason for Gains
Several ideas underlie the gains from trade
• When a buyer and a seller engage in a voluntary transaction, both receive
something that they want and both can be made better off.
• Australian consumers could buy cars through international trade that
they otherwise would have a difficult time producing.
• The producer of the cars receives income that it can use to buy the
things that it desires.
• This is sometimes referred to as mutually beneficial trade.
1-33
Van Pham | ECON3116 International Trade Theory and Policy
• How could a country that is the most (least) efficient producer of everything
gain from trade?
• With a finite amount of resources, countries can use those resources to
produce what they are most productive at (compared to their other
production choices), then trade those products for goods and services that
they want to consume.
• Countries can specialize in production, while consuming many goods and
services through trade.
1-34
Gains from Trade – Reason for Gains
Van Pham | ECON3116 International Trade Theory and Policy
• Trade is predicted to benefit a country by making it more efficient when it
exports goods which use abundant resources and imports goods which
use scarce resources.
• When countries specialize, they may also be more efficient due to large
scale production.
• Trade allows for a greater variety of goods available to consumers.
• Trade leads to more competition among domestic firms and a more
efficient allocation of resources in the domestic economy.
1-35
Gains from Trade – Reason for Gains
Van Pham | ECON3116 International Trade Theory and Policy
Gains from Trade – Who might lose?
Trade is predicted to benefit countries as a whole in several ways, but trade
may harm particular groups within a country.
• International trade can adversely affect the owners of resources that are used
intensively in industries that compete with imports.
• Trade may therefore have effects on the distribution of income within a
country, e.g., changes in wages of high and low-skilled workers
• Conflicts about trade should occur between groups within countries rather
than between countries.