Question

Explain the South Korean international trade by one or two trade theories (example: Heckscher-Ohlin model difference in resources, gravity model difference in economic scale and distance)

Answer 1

The gravity model explains the volume of trade. The gravity analysis used to evaluate trade policy issues like protection and openness, merits of proposed regional trade arrangements and national boarder effects. There is a special attention given to the trade policies in South Korea. With product differentiation in the economy, there is a generation of gravity. There is model identification problem in gravity estimation emerged. If the production is not perfectly specialized across countries, the H-O model and differentiated product model will give empirical access to gravity equation. The H-O theorem explain the success of gravity equation when explaining the bilateral trade flows between countries with high share of intra industry trade with increasing returns in the monopolistic competition. In South Korea the gravity model explain the role of geopolitical factors such as distance, boarder sharing, common language, historical cases etc. China and Japan are the two major trading partners of Korea. Here, the distance variable is a restrictive factor on trade which shows the trade barriers like transportation cost, delivery time, cultural unfamiliarity and market access barriers. Korea’s trade pattern was identified through trade conformity index. This index measures the trade complementarities between trading countries.
If the coefficient of the trade conformity index is positive, the trade volume will increase with high complementarities. This positive coefficient represents the H-O model of intra industry trade. This coefficient distinguishes the mutually exclusive hypothesis. In Korean perspective the coefficient shows a positive value with high statistical significance. This shows Korea followed H-O trade model. Korean trade flow depends on comparative advantage, income difference and the level of development stage gap. Among the gravity mode, H-O trade model also used to determine the trading behaviour of Korean economy.