Old Ideas About Foreign Trade Are Being Retired

Most academic models of international trade are pretty simplistic. Some of these models are surprisingly effective for making certain types of predictions -- for example, economists are very good at predicting how much different countries will trade with each other. But they’re not so good at predicting what kind of things the countries will specialize in, which country will have a trade deficit or surplus, how trade will affect growth, or which workers and businesses will benefit from trade.

It might be that in order to get at these questions, economists will have to abandon their simple models and think about the complexity of international trade. Economic theorists have long realized that the linkages between different products, both within and between countries, might be crucially important to those nations’ prosperity. But until recently, the data and statistical methods didn’t allow a detailed mapping of the structure of economic specialization around the world. Now, a number of economists are working on new empirical approaches that take into account the huge variety and complicated connections between the products and services that get traded across international borders.