UC3M
INTERNATIONAL ECONOMICS
Problem Set 1
INSTRUCTIONS: This problem set is due in your following reduced class.
1. i) How the relative importance of the foreign sector is usually measured in most countries? ii) Surprisingly
enough, the relative size of the foreign sector is bigger in Belgium than in Japan or USA. Could you explain this
fact? iii) Could the relative size of exports (with respect to GDP) can be higher than 100 %? iv) In most regions
the transportation costs as percentage of the total cost has been dropping, but tis has not been the case in the
developing Asia (which includes China, India and Indonesia). Could you explain this surprising fact?
2. Canada and South Korea have a similar population and GDP. Nevertheless, they differ in their pattern of trade:
Canada trades mostly with US, while 60 % of the Korean trade is divided among China, Japan, the US and
ASEAN (Association of Southeast Asian Nations). Can the gravity model explain these differences?
3. Consider the gravity model where: Tij = AYia Yjb /Di,j . Using this equation, can we deduct that if the GDP of
countries i and j doubles, then the trade between them will also cuadruple?
4. A century ago most British imports came for relatively distant locations: Latin America, Asia and North America.
Today, most British imports come from European countries. Is this fact supported by the Gravity model?
5. East Asian countries have increased their share of world trade, and also inter-asian trade has grown as a share
of world trade. Explain this fact using the gravity model.
6. Read Alan Blinder´s article: Offshoring: The Next Industrial Revolution? How will offshoring affect the pattern of
world trade? Will this changes benefit equally to all countries? (You can find the article in the Reading Material
folder).