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Korea Trade Collapse

In: Business and Management

Submitted By cu09
Words 1515
Pages 7
Republic of Korea
The global economy suffered its greatest collapse since World War II between the end of 2008 and beginning of 2009. International trade declined right alongside this collapse with the WTO reporting that the global economic crisis sparked a 12.2% fall in the volume of global trade and a 2.5% reduction in world GDP. Economists around the world have come to the consensus that the trade collapse was caused by the contraction of global demand, although there are factors on the supply side that played a role as well. Commodity prices tumbled as the price bubble burst in 2008. This along with shrinking demand sent the value and volume of commodities trade down. The production and exports of manufacturing collapsed as consumers and firms waited out the initial shock of the downturn. This poses the question if the trade drop was demand driven, why was the trade drop so much larger than the GDP drop? Richard Baldwin answers this question by explaining that the demand shock interacted with “compositional” and “synchronicity” effects to heighten the trade-to-GDP ratio. The compositional effect outlines the differences between “postponeable”, consumer durable and investment goods and highlights a special role of postponeable goods in generating volatility of trade flow. Postponeable goods are goods that are produced at the last possible moment or built to order. They occupy a larger portion of the world trade rather than the world GDP. A sudden drop in the demand for postponeables will have a greater effect on world trade but will not change the proportion of world GDP much due to the compositional differences. The synchronicity effect explains why the collapse occurred in a more direct manner. International supply chains and the causes of the Great Recession add explanations as to why trade dropped across the world at the same time. The production

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