International trade performance: the gravity of Australia’s remoteness
Bryn Battersby and Robert Ewing, 2005
Treasury Working Paper no. 2005-03. The Australian Treasury's view of the gravity trade model's application to Australia.
"This paper has sought to evaluate the effect of remoteness on Australia’s aggregate level of trade using a gravity trade model ... Australia’s trade performance is about as good as, or perhaps slightly better than, would be expected given Australia’s distance from its trading partners. The estimated roughly 50 per cent rise in Australian trade were Australia to be as close to other economies as is the United Kingdom highlights the effects of Australia’s tyranny of distance. Importantly, while Australia faces challenges in its geographical isolation, its trade performance is no worse than should be expected, and has improved relative to the model’s predictions since the early 1980s."
Available at http://www.treasury.gov.au/documents/999/HTML/docshell.asp?URL=GravityandTrade.htm
Comparing Australian and United States productivity
Jyoti Rahman, 2006
The Australian Treasury explains that we may never be able to beat the Yanks - but on the other hand, we may be doing better than we think just to have gotten to where we are.
"Differences in geography and history mean that Australia misses many of the benefits of proximity that accrue to the US. These benefits include the economies of scale, intensity of competition, and low transportation costs that are available in more densely populated markets. As a result, these factors might lower Australia’s steady-state relative level of productivity ... The Australia-US productivity gap ... can at least in part be explained by a combination of: differences in human capital as represented by historical educational attainment; differences in product and labour market policy settings; and, the geographic and historical context of the Australian economy. Differences in physical capital per worker and industry structures do not appear to be primary explanations for the productivity gap."
Available at http://www.treasury.gov.au/documents/987/HTML/docshell.asp?URL=04_comparing_productivity.asp
Understanding productivity trends
Ben Dolman, Lan Lu and Jyoti Rahman, 2006
"The above-average productivity growth of the late 1990s permanently lifted the level of productivity, adding around $1,300 to GDP per person in 2003-04. It was underpinned by a series of broad and deep reforms, and assisted by ICT-related innovations. The economy is now more open, competitive and flexible, allowing it to take better advantage of future technological developments (including in ICT). Productivity growth over the latest cycle appears more consistent with long run averages.
It may be the case that many of the productivity benefits of these past reforms have already been realised. Future productivity trends will shed further light on this conjecture. Nevertheless, regardless of the causes of recent productivity trends, the future prosperity of the ageing population will depend on the economy’s ability to find new ways of adding to productivity."
Available at http://www.treasury.gov.au/documents/1087/HTML/docshell.asp?URL=04_Productivity_trends.asp
Foreign Direct Investment Behavior of Multinational Corporations
Bruce A. Blonigen, NBER Reporter
"There is increasing recognition that understanding the forces of economic globalization requires looking first at foreign direct investment (FDI) by multinational corporations (MNCs): that is, when a firm based in one country locates or acquires production facilities in other countries. While real world GDP grew at a 2.5 percent annual rate and real world exports grew by 5.6 percent annually from 1986 through 1999, United Nations data show that real world FDI inflows grew by 17.7 percent over this same period! Additionally, MNCs mediate most world trade flows. For example, Bernard, Jensen, and Schott find that 90 percent of U.S. exports and imports flow through a U.S. MNC, with roughly 50 percent of U.S. trade flows occurring between affiliates of the same MNC, or what is termed intra-firm trade."
Available at http://www.nber.org/reporter/winter06/blonigen.html
Trade Openness: An Australian Perspective
Simon Guttmann and Anthony Richards, December 2004
"While gravity models suggest Australia trades much more than expected, the openness equation suggests that its level of trade is relatively close to what would be expected. The most important factors in explaining Australia’s low openness ratio are its distance to the rest of the world, and to a lesser extent its large geographic size."
Available at www.rba.gov.au/rdp/RDP2004-11.pdf
Trade, Growth and the Size of Countries
Alberto Alesina, Enrico Spolaore and Romain Wacziarg
Produced for the Handbook of Economic Growth
"Size matters for economic performance."
Available at http://www.stanford.edu/~wacziarg/downloads/handbook.pdf
Distance, Skill Deepening and Development: Will Peripheral Countries Ever Get Rich?
Stephen J Redding and Peter Schott, April 2003
It may make less sense to get extra education in an economy like Australia's.
"This paper models the relationship between countries' distance from global economic activity, endogenous investments in education and economic development. Firms in remote locations pay greater trade costs on both exports and intermediate imports, reducing the amount of value added left to remunerate domestic factors of production. If skill-intensive sectors have higher trade costs, more pervasive input–output linkages or stronger increasing returns to scale, we show theoretically that remoteness depresses the skill premium and therefore incentives for human capital accumulation. Empirically, we exploit structural relationships from the model to demonstrate that countries with lower market access have lower levels of educational attainment. We also show that the world's most peripheral countries are becoming increasingly economically remote over time."
Available at www.som.yale.edu/Faculty/pks4/files/research/papers/gs_47.pdf
The Economic Geography of Trade, Production and Income: A Survey of Empirics
Henry G. Overman, Stephen Redding, Anthony J. Venables, July 2001
"Surveys the empirical literature on the economic geography of trade flows, factor prices, and the location of production. The discussion is structured around the empirical predictions of a canonical theoretical model. We review empirical evidence on the determinants of trade costs and the effects of these costs on trade flows. Geography is a major determinant of factor prices, and access to foreign markets alone is shown to explain some 35% of the cross-country variation in per capita income. The paper documents empirical findings of home market (or magnification) effects, suggesting that imperfectly competitive industries are drawn more than proportionately to locations with good market access. Sub-national evidence establishes the presence of industrial clustering, and we examine the roles played by product market linkages to customer and supplier firms, knowledge spillovers, and labour market externalities."
Available at www.ceres-uy.org/analisis/seminarios/033_Trabajo_Venables.pdf
International Technology Diffusion
Wolfgang Keller, April 2004, Journal of Economic Literature
Fascinating literature summary:
"The evidence points to a significant role for imports in international technology diffusion ... There is no econometric evidence for a strong learning-by-exporting effect ... Recent mirco productivity studies tend to estimate positive and in some cases also economically large spillovers associated with FDI ... The relative importance of international technology diffusion has been increasing with the level of economic integration in the world ... The ongoing interaction with foreign firms and consumers seems to be a process of knowledge discovery for firms that cannot be had from interacting only with other domestic firms."
Not currently available online
Geographic Localization of International Technology Diffusion
Wolfgang Keller, August 2001
"First, I find that technological knowledge is to a substantial degree local, not global, as the benefits from foreign spillovers are declining with distance. I estimate that the distance at which the amount of technological knowledge is halved is about 1,200 kilometres. Second, while technological knowledge has become considerably more global over time, strong spatial patterns do persist ... As a determinant of productivity, foreign R&D has significantly gained in importance relative to domestic R&D."
Not currently available online
The Value of Information in Growth and Development
Charles I. Jones
The problem with small, distant, dispersed economies is that it's harder to find people to help you solve your problems and seize your opportunities. But at least now we have the Internet.
"Management teams need to be matched up with several kinds of complementary information in order for productivity to be high ... How people obtain this information may depend on how many people close to them possess the needed information. Geography and trade may play an important role in determining the productivity levels, and improvements in information technology may help the spread of at least some kinds of information."
Available at http://elsa.berkeley.edu/~chad/info040.pdf
Does the Internet Defy the Law of Gravity?
Bernardo S. Blum and Avi Goldfarb, September 2005
The gravity trade effect is about more than just distance - it's about culture. The Internet does not completely defeat distance after all.
"We show that gravity holds in the case of digital goods that are consumed over the Internet and have no trading costs. Therefore, trade costs, although possibly important, cannot account for the effects of distance on trade. In particular, we show that Americans are more likely to visit websites from countries that are physically close than from countries that are far, even after controlling for country-level Internet expertise, language, income, immigrant stock, and many other factors. Furthermore, we show that this effect only holds for digital products that depend on taste, such as music, games, and pornography."
Available at www.rotman.utoronto.ca/~agoldfarb/gravity.pdf
Modelling Manufactured Exports: Evidence from Australian States
David Norman, April 2006
Reserve Bank Discussion Paper 2006-01. Using state data to model export activity shows:
"An inverse relationship between the strength of domestic demand and manufactured exports, controlling for trading partner GDP".
Available at www.rba.gov.au/PublicationsAndResearch/RDP/RDP2006-01.html
A Flat World, A Level Playing Field, a Small World After All, or None of the Above?
Edward E. Leamer, January 2006
Interesting conversational discussion of Thomas Friedman's The World Is Flat. Conclusion: the book is good; the metaphor is wrong, and economic models show that distance still matters.
Available at http://www.international.ucla.edu/cms/files/Leamer.pdf
The New Zealand Institute's Global New Zealand Economy project
A Kiwi think-tank tackles many of the issues addressed in Competing from Australia:
"New Zealand firms do face particular difficulties in moving into international markets because of the small size and remoteness of the New Zealand market. It is this combination of the importance of international engagement, and the difficulties that some New Zealand firms face in going global, that provides the motivation for this project."
Available at http://www.nzinstitute.org/index.php/globalnzeconomy/
Papers:
- Dancing with the stars?: The international performance of the New Zealand economy
- No country is an island: Moving the New Zealand economy forward by taking it to the world
