Wednesday, April 8, 2009

About That Scary Trade Graph

At Vox, Barry Eichengreen and Kevin O'Rourke have some scary graphs showing that, over the past year, some economic data looks as bad as or worse than during the first year of the Great Depression. (As further evidence of the burgeoning popularity of scary graphs, their pictures have been picked up by Paul Krugman, Ezra Klein, Yves Smith and David Beckworth).

One of them is the decline in world trade volumes: I would suggest that things aren't quite as scary they seem, because a growing proportion of world trade is in intermediate goods, and this leads to some double counting in the trade statistics.

For example, consider an iPod which is worth $150 when it leaves China, and includes a $70 hard drive made in the Philippines (this is a simplified from Hal Varian's article about the global production of the iPod). If China exports 1 less iPod, its exports decrease by $150, and the Philippines' exports decrease by $70. The total decline in world trade is $220, which is greater than the value of the iPod itself because the hard drive gets counted twice.

This "vertical specialization" where different parts of the production process occur in different countries is much more prevalent today than in the 1930's, and it provides one reason why the decline in trade appears so much more dramatic now.

Update (4/24): Mea culpa. I realize (thanks to Paul Krugman (!)) that I was thinking about this incorrectly... while intermediate goods trade does lead to double counting, which would make the decrease in the amount of trade appear excessively large, the double counting also affects the base from which the decline occurs, so the percentage change is not exaggerated.

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