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Feeling the Pinch

World trade essentially collapsed following the global financial crisis as consumers and businesses cut back spending on both domestic and foreign products. While a decline in demand helped drive down the value of global imports and exports, consumer choice played an interesting part. 

In our December issue of Finance & Development magazine we zoom in on one aspect of the story. Using Argentine wine exports as an example, Natalie Chen and Luciana Juvenal show that the nominal (before inflation) value of global trade fell also because consumers bought cheaper, lower-quality goods rather than more expensive, higher-quality products.

The pinch of recession

Chen and Juvenal show that because consumption of higher-quality goods is generally more sensitive to changes in income than that of lower-quality items, a sudden reduction in income may lead to a “flight from quality.” This means households in crisis-hit countries reduce not only the quantity but also the quality of the goods they consume. This, in turn, should lead to a bigger contraction in higher- than in lower-quality imports. The authors investigate whether the global financial crisis induced such a flight from quality; in the case of wine made in Argentina, that turned out to be the case.

For more news and analysis about Argentina, you can read our recent blog about the IMF’s annual check-up of the country’s economy.