As the state of California takes increasingly stringent measures in the face of a multi-year drought, there is mounting concern that water shortages will hamstring the state's economy. While we are in no danger of running out of water on a global level, regions from California to Pakistan to northeast Australia are being stretched to the limit by rising water demand and changing weather patterns. Water resources are distributed quite unevenly around the world, but global export markets can help alleviate water imbalances by allowing countries and regions rich with fresh water to focus on the production of water- intensive goods. A recent article appearing in the American Economic Journal: Applied Economics uses an economic model of international trade to better understand the role of water in the global economy. In The Global Economics of Water: Is Water a Source of Comparative Advantage? Author Peter Debaere asks whether water resources have any bearing on a country's exports. In the 19905, hydrologists began to consider the fact that while water is not actually shipped internationally in bulk, it is effectively traded in the form of finished goods that require water to produce. When a carton of shirts crosses the Pacific in the hold of a cargo ship, the thousands of gallons of water that were required to make them do not need to come along. Still, that water can be thought of as part of a worldwide "virtual water" trade. In this way, water-scarce countries can enjoy the bounty of water-produced goods, and conserve their smaller water resources. This is the basic trade theory of comparative advantage at work. But if global trade is highly dependent on water availability, then changing precipitation patterns have the potential to signicantly disrupt the economies of several countries. To measure the impact of water resources on the industrial mix in each country, the author develops a measure of "water intensity" intended to capture the ratio of water costs to total value added in each industry. Data collected in the United States show that water intensity varies signicantly by industry: sugarcane farming and stone quarrying rank near the top, while the manufacture of medical equipment uses almost no water as a percentage of value. If global markets are using water as a source of comparative advantage, then each country' s exports will reect local water availability. Waterrich countries like Russia and Brazil will be more likely to concentrate in water- intensive sectors like agriculture and mining, while waterpoor economies in Africa, Europe, and western Asia will tend to import these goods and focus their exports in other industries. Debaere feeds this data into a model of national exports, which seeks to explain the export mix in each country based on the amount of water, capital, land, and skilled labor available. As expected, countries with greater water resources export more water-intensive goods, but the relationship is much weaker than that for capital or skilled labor. A standard-deviation increase in water resources per capita is associated with only a 0.05 standard- deviation increase in exports. 49 PROGRAMME MNDBOOK: JANUARY 2021 mm MAN COSA: MBA (GENERAL) STAGE 1 so The evidence suggests that water~scarce countries, at least to some extent, protect their scarce water resources by exporting less water-intensive goods that would tax their scarce resources even more. (Debaere 2014). These results should reassure us that changing water availability, while potentially disruptive in some countries, will not throw global trade into disarray. This is explained in part by the fact that water is generally so cheap that it only makes up 1396 of a producer's added value in most industries outside of agriculture; even a doubling or tripling of water prices does not signicantly alter a producer's protability