Factor Proportions and the Growth of World Trade

Most of the expansion of global trade during the last three decades has been of the North-South kind - between capital-abundant developed and labour-abundant developing countries. Based on this observation, I argue that the recent growth of world trade is best understood from a factor-proportions perspective. I present novel evidence documenting that differences in capital-labour ratios across countries have increased in the wake of two shocks to the global economy: i) the opening up of China and ii) financial globalisation and the resulting upstream capital flows towards capital-abundant regions. I analyse their impact on specialisation and the volume of trade in a dynamic model which combines factor-proportions trade in goods with international trade in financial assets. Calibrating this model, I find that it can account for 60% of world trade growth between 1980 and 2007. It is also capable of predicting international investment patterns which are consistent with the dat

Stock returns after a Brexit vote: the winners and the losers

Numerous reports warn that Brexit may have negative effects on the UK stock market. But whatever the outcome, it seems unlikely that the impact will be a uniform one, argue Costas Milas, Tim Worrall, and Robert Zymek

Gravity across Space and Time

How well can the standard gravity equation account for the evolution of global trade flows over the long run? This paper provides the first systematic attempt to answer this question using a newly-assembled data set of bilateral trade flows, income levels and trade frictions that spans the years from 1870 to 2005. Using this panel data set we perform a structural estimation of the gravity equation and compare the gravitypredicted trade flows with their empirical counterparts. The estimation results highlight two major puzzles: (i) the standard gravity model can explain only a small share of the variation in trade flows over time, and (ii) it requires very large time-invariant trade costs to match the average value of trade flows between country pairs. The two puzzles appear to be closely related to the assumption of a constant trade elasticity throughout the entire sample period. Allowing for modest changes in the trade elasticity across sub-periods significantly improves the time-series fit of the gravity equation and reduces to more reasonable magnitudes the time-invariant trade costs required for gravity-predicted trade flows to match the data. These findings suggest that the key to reconciling the gravity equation with the experience of globalisation history may lie in understanding the reasons for changes in the trade elasticity over time