Trade and the Global Recession

We develop a dynamic multi-country general equilibrium model to investigate forces acting on the global economy during the Great Recession and ensuing recovery. Our multi-sector framework accounts completely for countries' trade, investment, production, and GDPs in terms of different sets of shocks. Applying the model to 21 countries, we investigate the 29 percent drop in world trade in manufactures during 2008-2009. A shift in final spending away from tradable sectors, largely caused by declines in durables investment efficiency, account for most of the collapse in trade relative to GDP. Shocks to trade frictions, productivity, and demand play minor roles.