International Economics

INTERNATIONAL ECONOMICS
International Economics

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INTERNATIONAL ECONOMICS
1a) What do you understand by global trade?
Global trade refers to the exchange of goods, capital and services between countries across
international boundaries (Acharyya & Kar, 2014). There has been a significant rise in global
trade due to increased globalisation and advancement of technology. In 2017, the global
exports of goods the world over was around US$17.7 trillion (Statista, 2019).
1b) Suggest any three (3) reasons why countries trade with one another
The three reasons suggesting why countries trade are:
Lack of labour- The outsourcing of manufacturing facilities by the USA to China is a result
of labour abundance in China (Parsons, 2015).
Labour productivity- High labour productivity in the UK have led to setting up of research
and development facilities of global automotive manufacturers in the country (Driffield,
2013).
Natural resources- Unequal distribution of natural resources across the world, for example
high concentration of oil in OPEC nations making them net oil exporters.
1c) Identify and discuss two major factors that are capable of affecting trade between
countries, from the point of view of the ‘gravity model’.
As per ‘Gravity Model’, two major factors affecting international trade are (Christiansen,
2014):
1 Size of a country’s economy- Large economies like the USA have significant capacity to
export and import owing to the sheer size of their economies and economic activities.
2 Distance between countries- Increasing distance impacts transportation costs and important
communication requirements for trade. China is better off importing crude oil from Russia

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INTERNATIONAL ECONOMICS
owing to close proximity. As per Gravity model, for every 1% increase in distance between
countries, decrease in volume trade is around 0.7%.
1d) How does changing composition of trade affect the volume of trade between
countries?
Changing composition of trade over the years impacts the volume of trade between countries.
While earlier the USA was a net importer of oil, the country is progressing towards being net
exporter of crude oil and refined products which is expected to earn the nation high export
revenues in the coming years (Reuters, 2018). Developed nations with advanced technologies
and high labour productivity export more of manufactured products with high monetary
value.
2a) What is intra-industry trade?
Intra-industry trade refers to international exchange of similar goods/services belonging to
the same industry. For example, around 51% of the UK car exports go to European Union
while one-third of EU car exports head to the UK (European Automotive Manufacturers
Association, 2019). Intra-industry trade encompasses product input trade in the same
industry.
2b) How popular is it?
Intra-industry trade is highly popular accounting for around 25%-50% of global trade (Ortiz-
Ospina, et al., 2018). Intra-industry trade facilitates innovation as well as economies of scale
within an industry thus aiding in healthy competition and resource optimisation.
2c) Give three (3) strategies used by firms to enter into new foreign markets