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Trade and the Global Recession

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Author Info

  • Sam Kortum

    (University of Chicago)

  • John Romalis

    (University of Chicago)

  • Brent Neiman

    (University of Chicago)

  • Jonathan Eaton

    (Penn State University)

Abstract

The World Trade Organization forecasts that the volume of global trade will in 2009 exhibit its biggest contraction since World War II. This large drop in international trade is generating significant attention and concern. Given the severity of the current global recession, is international trade behaving as we would expect? Or alternatively, is international trade shrinking due to factors unique to cross border transactions per se? This paper merges a global input-output model with a gravity trade structure in order to quantitatively answer these questions. The framework distinguishes a drop in trade resulting from a decline in the tradable good sector from a drop resulting from worsening trade frictions. We demonstrate empirically that given the geographic distribution and size of the decline in demand for manufactures, the overall decline in trade flows of manufactured goods is in fact larger than would be expected, though the scale of this deviation does not stand out as historically exceptional. We use the model to solve numerically several counterfactual scenarios which give a quantitative sense for the relative importance of trade frictions and other shocks in the current recession. Our results suggest that the decline in demand for manufactures is the most important driver of the decline in manufacturing trade. An increase in trade frictions also plays an important role, but one that varies substantially across countries.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1340.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1340

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  1. Jonathan Eaton & Samuel Kortum & Brent Neiman, 2013. "On Deficits and Unemployment," Revue économique, Presses de Sciences-Po, vol. 64(3), pages 405-420.
  2. Costas Arkolakis & Arnaud Costinot & Andrés Rodríguez-Clare, 2009. "New Trade Models, Same Old Gains?," NBER Working Papers 15628, National Bureau of Economic Research, Inc.
  3. Samuel S. Kortum & Jonathan Eaton & Brent Neiman & John Romalis, 2010. "Trade and the Global Recession," DEGIT Conference Papers c015_002, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Smits, J.-P. & Woltjer, P. & Ma, D., 2009. "A Dataset on Comparative Historical National Accounts, ca.1870-1950: A Time-Series Perspective," GGDC Research Memorandum GD-107, Groningen Growth and Development Centre, University of Groningen.
  5. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "The Great Trade Collapse of 2008-09: An Inventory Adjustment?," NBER Working Papers 16059, National Bureau of Economic Research, Inc.
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  7. Bricongne, Jean-Charles & Fontagné, Lionel & Gaulier, Guillaume & Taglioni, Daria & Vicard, Vincent, 2012. "Firms and the global crisis: French exports in the turmoil," Journal of International Economics, Elsevier, vol. 87(1), pages 134-146.
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  12. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc.
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  14. Charles Engel & Jian Wang, 2007. "International trade in durable goods: understanding volatility, cyclicality, and elastics," Globalization and Monetary Policy Institute Working Paper 03, Federal Reserve Bank of Dallas.
  15. Fernandez, Roque B, 1981. "A Methodological Note on the Estimation of Time Series," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 471-76, August.
  16. Lorenzo Caliendo & Fernando Parro, 2012. "Estimates of the Trade and Welfare Effects of NAFTA," NBER Working Papers 18508, National Bureau of Economic Research, Inc.
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