Entropy and Relative Entropy in the Composition of Commodities

This study uses statistical and information-theoretic measures to analyze the dynamics of the five top trading countries' positions in exporting eight commodities and their trade dependency on the GDP of corresponding importers from 1995 to 2017. Results from the Shannon entropy show that China has emerged as a trade giant in the 21st century, while the USA and Germany have dominated steadily. The relationship between trade and GDP is investigated from the relative entropy of VAR-predicted and empirical time series, revealing a higher divergence during financial crises. This implies relatively less market predictability during crises due to risk, reduced production and supply, and less market orientation of exporters. We observe that the USA and Germany are market-oriented exporters, China has become trade-reliant in this century, and Japan and France show relatively less production and supply. The Machinery and transport equipment market is found to be useful in identifying financial crises as it is more sensitive to financial risk and can be considered an important financial branch to tackle crises. The remarks of this research can be useful for traders and policymakers of the international trade market in portfolio investment and risk management.