Article Review on International Trade

Question: Write about theArticle Review on International Trade. Answer: Introduction The article presents an econometric analysis of trade patterns of Korea and how various factors affect complementarily of Korea and her business partners (Sohn, 2001). The reason for choosing this article to review it is because it takes an empirical analysis of trade patterns using the gravity model. The article is also relevant because not only does it present an empirical analysis of Korea but also suggests possible ways through which the country can expand international trade. Furthermore, the article takes into account geographical factors such as adjacency, population, and distance which play a major role in gravity model analysis (Sohn, 2001). These factors have been disregarded by most economists and theorists yet they have a great impact on the eligibility of the gravity model in the analysis. Research Question The research seeks to understand the suitability of Koreas trade patterns to the regional trade agreements and how the countrys trade patterns conform to gravity model. The paper analyses Koreas trade patterns using the gravity model and determines how Korea's bilateral trade structures support trade flows of the country. The article also provides foundations upon which gravity model is founded and how several economists have provided an econometric analysis using the same model. The gravity model is theoretically supported by two competing international trade models. The two models that support gravity model are Heckscher-Ohlin Model and Differentiated Product Model (Van Brakman, 2010). The article tries to identify the relationship between the GDP of a country and bilateral trade flows. Gravity equation corresponds with differentiated products model, and therefore gravity model can, therefore, be applied to trade flows. In section three, the paper estimates the effect of distance, GDP, and GDP per capita using gravity model and how they are related to Korean trade flows. Lastly, the article analyzes two significant policy implications when compar ing predicted and actual bilateral trade flows. Critical analysis of the article reveals that the author did a thorough research and supported his arguments with data from different sources. Part 2 Economic Theory Gravity model was originally based on Newton's Physical theory. The gravity model is applied in international trade with an aim to explain trade patterns and bilateral trade flows between two economies (Van et al. 2010). Each of the economies is regarded as an organic body that can attract another economy proportionally with the economic size and inverse to the distance between the economies. Gravity model can be simplified in the following form. Tij = A ( YiYj /Dij) Tij=bilateral trade flows (imports and exports) Yi=Gross Domestic Product of country i Yj=Gross Domestic Product of country j Dij=Distance between two countries j and i A=Constant of proportionality A part from the basic variables defined above, gravity model, can also incorporate other variables such economic integration, population and adjacency as a representation of cultural and geographical factors (Kennedy, 2014). Gravity model was first used in international trade by Poynohen and Tinbergen in the 1960s where they used gravity equations to conduct an econometric analysis presenting empirical evidence but did not provide any theoretical justification. Econometric analyses carried out by various economists reveal that both Heckscher-Ohlin model and product differentiation model can both serve to explain gravity model (Chakraborty Mukherjee, 2016). Data Description The article was a cross-sectional analysis of Korea about bilateral trade flows of the country under study and its trade partners. Data on Sectoral exports and imports and the total trade flows was taken from GTAP statistics of 1995, and the samples were composed of 30 trade partners of Korea (Sohn, 2001). Statistics from other sources tend to be unreliable because the information provided is not publicly available. 1995 was chosen as the base year because data of 1995 is a reflection of general trade performance of Korea (Kennedy, 2014). Information about the population and GDP was obtained from National Accounts of Korea that had been published by International Financial Statistics branch of IMF and the Bank of Korea (Sohn, 2001). Econometric Analysis Gravity equation for regression analysis, in this case, took the form: Ln Tij= + 1Ln [YI Yj] + 2 Ln [(Y/P)i(Y/P)j]+3LnDij+ij Where; Tij=are the imports and exports between Korea (i) and other trading partners (j) YI Yj=product of GDPs of country j and that one of Korea (Y/P)i(Y/P)j=Product of per capita GDP for the two countries Dij=Distance between Koreas trading partners and Korea. The R-squared value for the model is around 0.786 which implies that gravity model was high efficient in explanation of bilateral trade flows of Korea (Sohn, 2001). The coefficient on the GDP variable is statistically significant and was estimated to be around 0.728 (Sohn, 2001). Empirical Findings Since the coefficient of GDP variable is 0.728, it means holding other factors a 1 percent point increase in GDP results to 0. 728 percent increase in Koreas bilateral trade flows (Sohn, 2001). Part 3 Conclusion Due to the importance of International trade in Korea, the article presented an empirical analysis of Korea's trade patterns using the Gravity model. The paper also sought to establish the determinant factors of bilateral trade flows in Korea and how the country can expand the same. From the results, it was deduced that bilateral trade flows in Korea is directly proportional to trading partner's GDP and inversely proportional to the distance involved. The results is an implication that Korea depends on GDP pattern rather than per capita GDP (Chakraborty et al. 2016). References Chakraborty, D., Mukherjee, J. (Eds.). (2016). Trade, Investment and Economic Development in Asia: Empirical and Policy Issues. Routledge. Kennedy, M. M. J. (2014). International economics. Place of publication not identified: Prentice-Hall Of India. Sohn, C. H. (2001). A gravity model analysis of Korea's trade patterns and the effects of a regional trading arrangement. Korea Institute for International Economic Policy Working Paper Series, 2001, 09. Van Bergeijk, P. A., Brakman, S. (Eds.). (2010). The gravity model in international trade: Advances and applications. Cambridge University Press.