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| evolution of the economy |
At the same time, there are other forces working against
agglomeration, so-called (centrifugal forces) that encourage economic
activity to spread out geographically. (Trade) has a crucial influence
in deciding which tendency will dominate at a given stage in the
evolution of the economy. The expansion of manufacturing requires
attracting labour from agriculture by the possibility of higher wages.
But then countries that are essentially agricultural may start to
develop industry, and offer lower wages than the traditional core
industrial nations. This helps to develop manufacturing in these
less central economies. If trade costs continue to fall, low wages
may prove sufficiently attractive to overcome the disadvantages of
manufacturing goods with a relatively unskilled workforce away
from the main markets.
Literature on the analysis of trade flows
often refers to computable general
equilibrium (CGE) and gravity models.
The CGE models use detailed information
on the structures of selected economies
and policies, and integrate them in a
multi-country, multi-sector, “marketclearing”
framework with a sophisticated
representation of demand and supply
relations.
Market-clearing is the idea that markets
will eventually clear excess supply or
unmet demand. This approach is used for
predictions of the future effects of a set
of economic policies and enables a rich
analysis of trade liberalisation scenarios at
various levels.
In contrast to the gravity approach,
CGE analysis allows direct assessment
of welfare effects of trade reforms.
Each result can be traced back to
theoretical assumptions and the structural
The gravity approach uses historical data
to study the statistical significance and
and other factors, including the effects of
The basic version of the gravity model
(relates the volume of bilateral (trade
flows to the economic size of two trading
countries as well as to economic “distance”
as measured by various trade costs.
This approach can help in understanding
historical trends and in particular to
separate the impact of trade policy changes
from other factors affecting trade volumes.
But it is not directly useful for assessing
the welfare implications or distributional
aspects of trade policy changes (“winners
and losers” in the country concerned).
Incidentally, behind an expression like
analysis of trade flows” there lies a“
phenomenal amount of data collection and
processing. The gravity model analyses this
chapter draws on, by OECD economists
Kowalski and Shepherd, involved processing
1.5 million lines of data.
48 (OECD Insights: (International Trade
Although there has been some decline in the share of
manufacturing output from the core group of industrial countries
over the past quarter of a century, this decline has been relatively
small. These countries accounted for about 86% of world
manufacturing output in 1976, and in 2002, their share was still
about 81%. This focus on manufacturing as a whole may, however,
hide changes in specific sectors. In the case of iron and steel, for
example, the core’s share has fallen from more than 70% to about
50% of global output. The takeover of the Anglo-Dutch steel group
Corus by Indian-based Tata Steel in 2007 shows how multinationals
originating in developing countries are starting to have an impact
(on (world markets.
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