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Macro & Micro economics - Essay Example

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The Great Depression was one of the most severe economic downturn that the world faced during the twentieth century in pre-World War era.The phase which started from 1929 lasted for more than a decade and its effect was faced by most of the nations …
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Macro & Micro economics

Download file to see previous pages... The phase which started from 1929 lasted for more than a decade and its effect was faced by most of the nations around the globe. The Great Recession of 2008 on the other hand took place due to a host of reasons including the subprime lending crisis, the burst of the US housing bubble, the drastic increase in the price of oil in the country and the devaluation of dollar. This report looks into the various aspects of the setbacks in the international trade caused by the collapse in US financial markets. The focus of this report is the main areas of the UK and EU which are in trade relations with the country of United States. Finally the changes in the trade policies in the post financial crisis period have been analysed. Causes and Mechanisms of the collapse of the world trade As during the time of the Great Depression when the phase saw increase in the rate of unemployment, lack of liquidity in the economy and various situations of bankruptcy, the great recession also witnessed the similar trouble. The economy faced a decline in the import and exports which in turn affected those countries which depended mostly on foreign trade during the 1930s (Bernard, Jensen, Redding and Schott, 2009, p. 491). Similar thing happened at the time of the US recession in 2008. The entire economy experienced a plunge in the global trade which accounted for about 30% decline compared to the GDP of the country. The trade figures for the country have been shown with the help of the export import trends of the country. Figure 1: Export of US Source: www.tradingeconomics.com It is clear that the exports of the country had been increasing from before 2004. However, trade faced a jolt in 2009 at the outset of the period of recession. The trade of US recovered from 2010 and it is exhibiting an upward trend at the present day. Similar situations can be noticed in the European Union. The export situation for this region also faced the similar consequences as that of the US (Velde, 2011, pp 1–28). Figure 2: Exports in European Union Source: www.tradingeconomics.com Economists have provided a host of reasons that would justify the trade collapse. First of all the supply chain linkages have caused a drop in the trade figures. The vertical linkage hypothesis believes that with a decrease in the demand for the final goods, the demands for the intermediate goods that add value to the final product are also at stake. With the advent of liberalisation, division of labour has taken place across countries and a lot of specialisation has occurred in the production process (Yi, 2003, p. 65). Thus if the aggregate demand in one country reduced it has an effect on the balance of trade of all the related countries. The compositional effect is a second reason why the international trade dropped during 2009. Trade of a country may take place in various sectors but there is a definite proportion in which it should take place. If inconsistent trade takes place in the sectors with the worse affected level of domestic absorption, then the trade to GDP ratio would be most adversely affected (Erceg, Guerrieri and Gust, 2008, p. 2637). The US data on industrial production would be able to support this hypothesis. It has been empirically tested that the drop in trade took place more in the sectors that reported decline in the domestic output the most. Figure 3: Trade across product categories Source: www.wto.org Finally the shortage of credit was the reason why trade could not take place at its full capacity. Any firm in order to carry on with the ...Download file to see next pagesRead More
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