Measuring Openness: VADE, Not Trade
The ratio of trade (exports plus imports) to GDP is often used to gauge the orientation of a country's economic activity to the world market; but GDP measures value added, whereas trade is measured as gross value and double-counts imported inputs embodied in exports. High trade/GDP ratios can thus mislead policymakers, especially when low domestic-content (DC) assembly production displaces high DC traditional exports, as in Mexico and the Caribbean in the 1980s and 1990s. This paper proposes a better measure of openness, which is the ratio of value added destined for exports (VADE) to GDP. It outlines methods for making both rough and more precise estimates of VADE, and presents illustrative results for China, the Dominican Republic and Mexico. In all of these cases VADE/GDP is no more than one-third, and probably closer to one-quarter, of trade/GDP.
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Volume (Year): 40 (2012)
Issue (Month): 1 (September)
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