Measuring foreign exposure

We introduce a model-based approximation for assessing foreign exposure via direct and indirect trade. In the model, exposure can be approximated by the fraction of production sold abroad, either directly or indirectly. Simulations show that this ratio accurately reflects the responses of value added to foreign supply shocks across most of the parameter space. It also effectively captures the responses of value added to foreign demand or trade shocks for a more restricted range of parameters. Conversely, other well-known metrics of foreign exposure do not perform well in the simulations. Data show that our measure of foreign exposure correlates significantly with various measures of economic activity, even in service sectors generally thought to be insulated from foreign influences. In contrast, these correlations are either insignificant or incorrectly signed when alternative measures of foreign exposure are used.