4 thoughts on “Why has trade decreased so much in this recession?”

  1. Thanks for the link. One further comment though — trade costs in our methodology is merely a gravity residual, what’s not explained by changes in domestic GDP. Hence the explanatory “trade costs” includes not only declines in trade credits & trade financing, but also things we wouldn’t normally think of as purely “trade costs”, such as consumer-durable financing constraints… Since consumer durables are heavily traded (and more volatile than GDP), trade declines more… I think we could have been a bit more clear on this score…

    Anyway, we’ll take another stab soon using a dynamic gravity framework…

  2. We deflated Nominal GDPs with country GDP Deflators from the IFS, and the Trade flows using country import/export deflators from IFS… The latter involves a smaller sample, so we also tried converting everything into USD at 2005 Exchange rates, and then using the US GDP Deflators. Of course, the latter method, which is standard in the gravity lit, leads to obvious bias in overstating the decline in trade during periods when commodity prices are adjusting sharply… But then there’s a problem that we haven’t got really good trade deflators for the Great Depression, when commodities were likely similarly volatile… Deflating this stuff properly is a big issue, and a total headache.

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