In this entry we analyze available data and research on international trade patterns, including the determinants and consequences of globalization over the last couple of decades. Here is an overview of the main points we cover below.
- Over the last two centuries trade has grown remarkably, completely transforming the global economy. Today about one fourth of total global production is exported. Understanding this transformative process is important because trade has generated gains, but it has also had important distributional consequences.
- From a historical perspective, there have been two waves of globalization. The first wave started in the 19th century, and came to an end with the beginning of the First World War. The second wave started after the Second World War, and is still continuing.
- Trade transactions include both goods (tangible products that are physically shipped) and services (intangible commodities, such as tourism and financial services). The production chains for these goods and services are becoming increasingly complex and global. According to recent estimates, about 30% of the value of global exports comes from foreign inputs.
- Most trade theories in the economics literature focus on sources of comparative advantage. These theories postulate that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, based on their strengths. The empirical evidence shows that comparative advantage is indeed relevant; but it is not the only force driving incentives to specialization and trade.