Now let's consider the question of why international trade felt so fast
during the recent Great Recession.
Relative to GDP, which was already falling,
global trade fell by about 30% during the years 2008-2009.
So you may be wondering,
why is it that trade fell so much faster than GDP?
Well, keep in mind,
a lot of international trade is based in durables,
that is goods which can last a long time.
Non-durables are harder to trade, in part because they perish fairly rapidly,
but also a lot of non-durables such as, say, strawberries;
they're relatively easy to produce
and they're produced many different parts around the world,
and it's not that you need to go to the Silicon Valley of strawberry production
to get a good strawberry.
The thing about durable goods is that it's relatively easy
to postpone spending to buy a new one.
So if all of a sudden you're in a recession
and you lose your job or your income is lower,
rather than buy a new car, well, just get the old car fixed.
So what happens is that, in the short run,
expenditures on say automobiles will fall more rapidly
than, say, expenditures on food.
According to the best estimate we have,
the shift away from spending on durables during the recession;
that accounts for about 65% of the overall collapse in trade,
and that's taken from an important paper called
If you look at branded differentiated goods,
it's interesting to note that, during the Great Recession,
a lot of them didn't lower their prices at all.
They may have thought, "Well, soon demand will come back
and in any case, we don't want to cheapen our brand."
So that price remaining steady may be another reason why
demand is so much falling off.
Why not simply wait until your income is higher again.
Where we did see the price flexibility was for undifferentiated goods,
for instance, oil rather than, say, Mercedes-Benz.
During the Great Recession, the price of oil fell a good deal
and that helped to maintain the consumption of oil.
Another reason why some international trade fell off
during the Great Recession simply had to do with credit.
Some international trade is based on letters of credit, extension of credit
and trade credit,
and the great recession hit credit and financial intermediation very hard,
and that had a secondary knockdown effect on trade as well.
The good news about all this is just as international trade fell very rapidly,
it also recovered very rapidly in 2009-2010.
It was one of the first areas where
the global economy saw some systemic recovery.
This volatility for international trade
also meant a good deal of income volatility for some countries,
for instance, Singapore, which relies fairly heavily on international trade,
manufacturer, transport
and also being a financial center for international trade elsewhere.
2004 to 2007, growth in Singapore is about 7 to 9%, that's great.
2008 to 2009, the Great Recession,
growth in Singapore is only a little bit above 0.
2010, some recovery is coming,
and in Singapore, they get to make up some of the lost trade,
and it's growing now at about 14.8%.
And here, the initial plunge, and the very rapid bounce-back,
well mostly, those are coming from external forces.
To read more on this topic and for some background figures and information,
I very much recommend these three articles,
all available online.