Tyler Cowen finds an FT story about data from the World Trade Monitor, which calculates that global trade contracted in the first half of 2015.
Global trade is a subset of world GDP. That is, world GDP is a measure of the value of all goods and services traded, whether across borders or not.
Let us assume that world GDP expanded in the first half of this year. What ought we to conclude?
One possibility is that cross-border trade and overall trade are not perfectly correlated, and this is a blip in the relationship. However, another possibility is that GDP is mis-measuring economic activity. The value of government purchases is not market determined. The same might be said for health care and education, in that third-party payments are important.
In other words, there are three components of world GDP: goods and services exchanged at market prices across borders; goods and services exchanged at market prices domestically; and goods and services exchanged at artificial prices. If the first component of world GDP has been contracting, then my guess would be that the second component is, also.
Not necessarily. Much global trade has been driven by imbalances in current accounts. As those diminish, global trade will decline even though domestic trade increases as re-shoring becomes economic and this happens even if exporters domestic trade diminishes. In 2015 though, this is likely the decline in oil and commodity prices which does suggest a decline in world trade though less likely domestic trade.
I would guess that you are correct, although I suppose it is possible that converging labor market prices means the difference in price between goods produced in country A vs. country B are eroding and therefore there’s less incentive to purchase goods across borders.
Foreign trade often represents the marginal demand(supply) of/for goods so it will tend to lead total GDP. Interestingly, since 1990 when this series starts, global trade growth has turned negative twice and both coincided with US recessions.
Finally, although trade fell in the first half of 2015, the y/y growth is still positive.
A side note. this series is calculated by the Netherlands Bureau of Economic Analysis because trade is so important to their economy that they feel a need for a measure of trade to assess the economic environment for the Netherlands. They consider it a leading indicator for their economy.
Couldn’t this also reflect that services are increasing as a share of GDP and services are not as readily traded across borders as goods?