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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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Bibliographic Info

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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  1. James E. Anderson & Yoto V. Yotov, 2008. "The Changing Incidence of Geography," NBER Working Papers 14423, National Bureau of Economic Research, Inc.
  2. Prema-chandra Athukorala & Nobuaki Yamashita, 2005. "Production Fragmentation and Trade Integration: East Asia in a Global Context," Departmental Working Papers, The Australian National University, Arndt-Corden Department of Economics 2005-07, The Australian National University, Arndt-Corden Department of Economics.
  3. Jacks, David S. & Meissner, Christopher M. & Novy, Dennis, 2010. "Trade costs in the first wave of globalization," Explorations in Economic History, Elsevier, Elsevier, vol. 47(2), pages 127-141, April.
  4. Baldwin, Richard, 2007. "Trade Effects of the Euro: a Comparison of Estimators," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 22, pages 780-818.
  5. Berthelon, Matias & Freund, Caroline, 2004. "On the conservation of distance in international trade," Policy Research Working Paper Series 3293, The World Bank.
  6. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February.
  7. Simon J. Evenett & Wolfgang Keller, 2002. "On Theories Explaining the Success of the Gravity Equation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(2), pages 281-316, April.
  8. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  9. Egger, Hartmut & Egger, Peter, 2007. "Outsourcing and trade in a spatial world," Journal of Urban Economics, Elsevier, vol. 62(3), pages 441-470, November.
  10. Salvatore Baldone & Fabio Sdogati & Lucia Tajoli, 2006. "On some effects of international fragmentation of production on comparative advantages, trade flows, and the income of countries," KITeS Working Papers 187, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Nov 2006.
  11. 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.
  12. 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.
  13. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  14. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  15. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(2), pages 441-487, 05.
  16. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  17. Dr. Mitsuyo ANDO & Dr. Fukunari Kimura, 2009. "Fragmentation in East Asia: Further Evidence," Working Papers, Economic Research Institute for ASEAN and East Asia (ERIA) DP-2009-20, Economic Research Institute for ASEAN and East Asia (ERIA).
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Cited by:
  1. Athukorala, Prema-chandra & Yamashita, Nobuaki, 2006. "Production fragmentation and trade integration: East Asia in a global context," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 233-256, December.
  2. 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.
  3. Natalie Chen & Dennis Novy, 2012. "On the Measurement of Trade Costs: Direct vs. Indirect Approaches to Quantifying Standards and Technical Regulations," CEP Discussion Papers dp1164, Centre for Economic Performance, LSE.
  4. 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.
  5. 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.
  6. Yamashita, Nobuaki, 2011. "The People’s Republic of China’s Currency and Product Fragmentation," ADBI Working Papers 327, Asian Development Bank Institute.
  7. 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.

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