The Global Financial Crisis

Another structural difference between "now and then" worth probing relates to world trade volume, which, as Eichengreen and O'Rourke observe, has fallen more in the present recession than during the first year of the Great Depression. However, recent World Bank research suggests that the sharper recent trade decline compared to 1929/30 may to some extent reflect a much greater responsiveness or elasticity of trade with respect to GDP, rather than only a steeper decline in GDP driving a larger fall in trade. This research points to a sharp rise in the elasticity of world trade to GDP from under 2 in the 1960s to over 3.5 now, with even an even sharper responsiveness during downturns than during tranquil times. The reasons for this large increase in trade elasticity are not altogether clear, but one explanation put forward in the cited research is the rise of modern fragmented production processes, which result in vastly increased cross-border flows of intermediate inputs used in the production of any final product. The importance of such processes in the world economy and world trade has increased dramatically in recent decades. Today, declines in trade are likely to reflect much smaller declines in production value added than was in the case in the 1960s and, one could argue, a fortiori, even more than in 1929. The brighter side of the coin is that we should also see a much sharper upswing in world trade when the recovery in world output begins.