Purpose and content of

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Topic 2: The challenges of international trade

  • Globalization: a process of growing integration and interdependence of nations, characterized by the intensification of international links of all types – commercial, financial, cultural, migratory…

    • Growth factors for globalization:

      • The innovation and improvement of major technologies (especially in communications and transportation services)

      • The liberalization of international exchanges (geopolitical)


  • Technological revolution: It is an all-purpose revolution with a rapid and ample diffusion of the IT process.

    • Leapfrogging”: small and incremental innovations lead the dominant firm to stay ahead. However, sometimes, radical innovations will allow new firms to get ahead of the dominant firm

  • Liberalization:

    • It’s a process initiated after WWII which seek world peace through wealth sharing.

      • Bretton Woods agreements (IMF, World Bank, GATT (General Agreement on Tariffs and Trade, later WTO)

    • Most visible in international trade and the financial markets

    • Average tariff in manufactures in the industrialized countries was 40% at the end of WWII. At the beginning of this century they were 5%

    • In the recent past, we have also witnessed an increase in economic and political freedom

  • Reduction of trade costs:

    • Trade liberalization, more freedom and technological advances have facilitated economic integration and a lower cost of transaction among countries

    • Lower transaction costs:

      • Border effect: asymmetries in trade patterns between cities and regions of different countries that share a national border and those that are located in the same country.

      • Gravity model: predicts bilateral trade flows based on the economic sizes (often using GDP measurements) and distance between two units.

        • Countries are expected to have larger trade flows if they are large and close

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