Skip to content

What Causes Business Cycles to Sync More: Depth or Breadth of Trade?

Tuesday, July 14, 2015
business cycles and trade

In pairs of countries with stronger trade integration, the growth is more in sync. And this synchronization has to do more with the number of types of intermediate goods traded between the countries, rather than the volume of each good traded. In other words, the breadth plays a bigger role than the depth.

Consider two countries that trade with each other. One country has a rise in productivity, which leads to an increase in domestic output and income. In turn, this leads to importing more intermediate goods—or man-made goods used to produce other goods—from its trading partner, which leads to an increase in the trading partner’s output. Thus, their business cycles become synchronized.

Economist Ana Maria Santacreu of the St. Louis Fed examined this synchronization in a recent Economic Synopses essay. She reviewed a paper she wrote with Wei Liao of the Hong Kong Institute for Monetary Research, which aimed to see what drives this synchronization.1 In their study, the authors segmented the volumes of trade between two countries into two areas:

  • The number of types of different intermediate goods traded, called the extensive margin
  • The amount of each good traded, called the intensive margin

The authors found that both factors led to business cycles becoming more synchronized.

Bigger Factor: Extensive Margin or Intensive Margin?

The authors also found that the extensive margin explained most of the trade-output comovement. The intensive margin played a marginal role. In her Economic Synopses essay, Santacreu explained that shocks have a bigger effect on business cycles between countries when countries produce more differentiated intermediate goods. For example, a positive productivity shock might mean new firms join one country’s domestic economy. This would lead to new products to produce and export to the country’s trading partners.

Notes and References

1 Liao, Wei; and Santacreu, Ana Maria. “The Trade Comovement Puzzle and the Margins of International Trade,” Journal of International Economics, July 2015, Vol. 96, No. 2, pp. 266-88.

Additional Resources

Posted In OutputTrade  |  Tagged ana maria santacreubusiness cycletradeshocks
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.