Write a summary and critique, based on readings.
Summary
The global trade witnessed a big downturn due to worldwide lack of demand for investment products and merchandise. A major decline in demand took place between different quarters of 2008 and 2009. It was massive if a comparison made with three other downturns since World War II. Monthly data of the OECD from 1965 to 2009 shows November 2008 as worst hit period since a major downturn demand took place (Baldwin).
Real trade data of all member states of world trade organization shows that exports and imports got a substantial hit between 2008 and 2009 though not as sizeable as after great depression. Fuels and food make 25% of overall global trade. The downturn prices in these two also affected manufacturers. The manufacturers had to reduce their inventories, but no major shutdowns took place in manufacturing. Large oil-exporting countries that were not into any other trade activity got badly hit due to a sharp demand decline of fuel (Baldwin).
The world learned lessons from four major economic depressions of 1975, 1982, 1991 and 2001. One solution lied in the liberalization of global trade that all types of goods get imported and exported more freely to serve as raw material and also for value addition into finished goods (Baldwin).
Questions have raised, why a decline in trade was larger than Gross Domestic Product if it was demand driven. There is a general agreement that a massive drop on the demand side though fully applies to trade as a whole, but remains merely a small portion of Gross Domestic Product. Example, exports fell by 44.8% whereas Gross Domestic Product fell by just 4.8%. In other words, the sudden sharp decline in demand affected the trade five times more than GDP. It has also termed as a compositional effect (Baldwin).
A synchronicity effect that tells why this steep decline in demand evenly affected all trading nations at the same time as their exports and imports fell simultaneously. Manufacturers can read trends much earlier and cut their production accordingly through timely spreading the synchronicity data of sharp pull in demand to all nations in Europe, USA, and Asia (Baldwin).
Critical Analysis
The world has witnessed many economic depressions. One recent case is of subprime in the USA that started in August 2007 among G7 nations due to poor monetary management, which not only affected nations but led to Lehman Bro's bankruptcy. It created a worldwide crisis and sent panic throughout the economic world since all international institutions stopped lending, and markets went stand still. All World Trade activities almost halted to wait and see position. Since the electronic media was spreading this news so its effect was immediate and sharp thereby freezing the global trade (Baldwin).
Deep research of behavioral economic tells that people act in extreme risk averse manners when under fear of the unknown, in contrast to a game of cards while results can be measured or calculated to some extent. It tells that whether it be demand pull affecting the supply chain or other factors, including poor financial management, world trade imbalances shall continue to arise and are to be tackled promptly through the application of all methods by avoiding past mistakes (Baldwin).
Work Cited
Baldwin, Richard. "The Great Trade Collapse: What Caused It And What Does It Mean? | VOX, CEPR’S Policy Portal". Voxeu.org. 2009. Web. 22 Jan. 2016.
