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Gravity chains: estimating bilateral trade flows when parts and components trade is important

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  • Baldwin, Richard
  • Taglioni, Daria

Abstract

Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalisation of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of value added flows. This fact has important implications for the estimation of the gravity equation. We present empirical evidence that the standard gravity equation performs poorly by some measures when it is applied to bilateral flows where parts and components trade is important. We also provide a simple theoretical foundation for a modified gravity equation that is suited to explaining trade where international supply chains are important. JEL Classification: F01, F10

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Paper provided by European Central Bank in its series Working Paper Series with number 1401.

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Date of creation: Nov 2011
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Handle: RePEc:ecb:ecbwps:20111401

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Keywords: bilateral flows; gravity; parts and components trade; Value chains;

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References

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  11. Dr. Mitsuyo ANDO & Dr. Fukunari Kimura, 2009. "Fragmentation in East Asia: Further Evidence," Working Papers DP-2009-20, Economic Research Institute for ASEAN and East Asia (ERIA).
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  13. Kimura, Fukunari & Takahashi, Yuya & Hayakawa, Kazunobu, 2007. "Fragmentation and parts and components trade: Comparison between East Asia and Europe," The North American Journal of Economics and Finance, Elsevier, vol. 18(1), pages 23-40, February.
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  17. David T Coe & Arvind Subramanian & Natalia T Tamirisa, 2007. "The Missing Globalization Puzzle: Evidence of the Declining Importance of Distance," IMF Staff Papers, Palgrave Macmillan, vol. 54(1), pages 34-58, May.
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Cited by:
  1. Chen, Natalie & Novy, Dennis, 2012. "On the Measurement of Trade Costs: Direct vs. Indirect Approaches to Quantifying Standards and Technical Regulations," CEPR Discussion Papers 8883, C.E.P.R. Discussion Papers.
  2. Prema-chandra Athukorala & Nobuaki Yamashita, 2005. "Production Fragmentation and Trade Integration: East Asia in a Global Context," Departmental Working Papers 2005-07, The Australian National University, Arndt-Corden Department of Economics.
  3. Robert C. Johnson & Guillermo Noguera, 2012. "Fragmentation and Trade in Value Added over Four Decades," NBER Working Papers 18186, National Bureau of Economic Research, Inc.
  4. Yamashita, Nobuaki, 2011. "Production sharing and trade flows: A comparative analysis of Japan and the US," Journal of Asian Economics, Elsevier, vol. 22(5), pages 383-397, October.
  5. Guilhoto, Joaquim José Martins & Siroën, Jean-Marc & Yucer, Ayçil, 2013. "Internal and International Vertical Specialization– Estimations For Brazil and new Approach to Gravity Models," MPRA Paper 46897, University Library of Munich, Germany.
  6. Yamashita, Nobuaki, 2011. "The People’s Republic of China’s Currency and Product Fragmentation," ADBI Working Papers 327, Asian Development Bank Institute.
  7. Andrea Beltramello & Koen De Backer & Laurent Moussiegt, 2012. "The Export Performance of Countries within Global Value Chains (GVCs)," OECD Science, Technology and Industry Working Papers 2012/2, OECD Publishing.

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