Global Income Gaps and International Trade

B. Ravikumar, senior vice president and deputy director of research at the Federal Reserve Bank of St. Louis, talks about the role that trade plays in cross-country income differences.

How can international trade benefit both rich and poor nations?

In a 2019 Timely Topics Podcast Series episode, B. Ravikumar, senior vice president and deputy director of research at the Federal Reserve Bank of St. Louis, laid out some of the key concepts concerning trade and discussed how trade can reduce cross-country income gaps.

Ravikumar explained that countries gain from trade for two simple reasons. The first is that trade may allow a nation to acquire better and cheaper inputs.

“You would be better off importing coffee from Brazil or Colombia, German or Belgian chocolates, or steel from Japan, at a lower price than what you can effectively produce them here,” he said.

The second reason, he noted, is that trade allows a nation to allocate resources to things that it is better at producing.

“If you could import coffee from Brazil or Colombia, maybe you don’t have to allocate that many resources to the production of coffee in the U.S.,” he said. “And you could allocate them [the resources] to the production of something else that we are good at.”

In the podcast, Ravikumar also discussed the study of economic development, who wins and who loses in trade, barriers to trade and more. (The episode includes a transcript of the interview.)

Ravikumar noted that the question about global income gaps isn’t new, pointing out that Adam Smith addressed this in The Wealth of Nations in 1776.

Smith was trying to explain this gap at a time when the difference was a factor of two; that is, rich countries were twice as rich as poor countries, Ravikumar said.

“Now, it has grown quite a bit, so the gap is more like a factor of 35 or 40,” he said. “It’s a much bigger problem now.”