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

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  • Baldwin, Richard E.
  • 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

Suggested Citation

  • Baldwin, Richard E. & Taglioni, Daria, 2011. "Gravity chains: estimating bilateral trade flows when parts and components trade is important," Working Paper Series 1401, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111401
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    References listed on IDEAS

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    More about this item

    Keywords

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

    JEL classification:

    • F01 - International Economics - - General - - - Global Outlook
    • F10 - International Economics - - Trade - - - General

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