The importance of world shocks for the UK economy has been demonstrated by the events since 2007. This column suggests that world shocks are likely to have driven around two-thirds of the shortfall in output since 2007. Trade linkages are an important channel for the transmission of world shocks to the UK, but financial linkages and spillovers through uncertainty are likely to account for the majority of the impact.
To reduce the risk of international commerce banks offer specific trade finance products, the most prominent being letters of credit. This column employs US banking data to show that reductions in the supply of such trade finance have considerable effects on the levels and patterns of exports, especially to small and poor countries and during times of financial distress.
The share of compensation to labour in gross value added has declined in recent decades for most countries and industries around the world. Recent work has also used the share of compensation to labour in net value added as a proxy for inequality. This column discusses that gross and net labour shares have declined together for most countries since 1975 – an outcome consistent with the worldwide decline in the relative price of investment goods.
A large literature shows the importance of firm heterogeneity in determining trade patterns. This column discusses policy implementation issues related to the ‘new new trade theory’. The nature of an export good – be it consumption or production oriented – influences the importance of firm productivity in the export decision. The relationship between productivity and markups also varies across industries; pro-export policies must take account of this, lest they exacerbate distortion.
The Great Recession uncovered the difficulties that economic structural models have in explaining the data. This column proposes a methodology that can help identify the sources of mis-specification by introducing exogenous processes. These exogenous processes are not structural shocks but processes that can improve the fit. The results indicate that including more labour and asset frictions in economic models could improve their performance.
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