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Gravity Chains: Estimating Bilateral Trade Flows When Parts And Components Trade Is Important

Author

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  • Richard Baldwin
  • Daria Taglioni

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 the 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.

Suggested Citation

  • Richard Baldwin & Daria Taglioni, 2011. "Gravity Chains: Estimating Bilateral Trade Flows When Parts And Components Trade Is Important," NBER Working Papers 16672, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16672
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    1. Jean Balié & Davide Del Prete & Emiliano Magrini & Pierluigi Montalbano & Silvia Nenci, 2017. "Agriculture and Food Global Value Chains in Sub-Saharan Africa: Does bilateral trade policy impact on backward and forward participation?," Working Papers 4/17, Sapienza University of Rome, DISS.
    2. repec:idb:idbbks:6668 is not listed on IDEAS
    3. 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.
    4. Gordeev, Dmitriy & Idrisova, Vittoria & Kaukin, Andrei & Ponomarev, Yuriy & Filicheva, Evgeniya, 2016. "Analysis of Global Supply Chains in International Trade Patterns," Working Papers 765, Russian Presidential Academy of National Economy and Public Administration.
    5. Yang, Wen & Liu, Yi-Cheng & Mai, Chao-Cheng, 2017. "How did Japanese exports evolve from 1995 to 2014? A spatial econometric perspective," Japan and the World Economy, Elsevier, vol. 41(C), pages 50-58.
    6. Chen, Natalie & Novy, Dennis, 2012. "On the measurement of trade costs: direct vs. indirect approaches to quantifying standards and technical regulations," World Trade Review, Cambridge University Press, vol. 11(03), pages 401-414, July.
    7. Bosker, Maarten & Westbrock, Bastian, 2014. "A theory of trade in a global production network," CEPR Discussion Papers 9870, C.E.P.R. Discussion Papers.
    8. 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.
    9. 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.
    10. Prema-chandra Athukorala & Tala Talgaswatta & Omer Majeed, 2017. "Global production sharing: Exploring Australia's competitive edge," The World Economy, Wiley Blackwell, vol. 40(10), pages 2172-2192, October.
    11. Yamashita, Nobuaki, 2011. "The People’s Republic of China’s Currency and Product Fragmentation," ADBI Working Papers 327, Asian Development Bank Institute.
    12. 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.
    13. Fabien CANDAU & Florent DEISTING & Julie SCHLICK, 2016. "How Income and Crowding Eects inuence the World Market for French Wines," Working Papers 2015-2016_8, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Mar 2016.
    14. repec:taf:apeclt:v:24:y:2017:i:19:p:1378-1384 is not listed on IDEAS
    15. 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.
    16. Jan Fidrmuc & Jarko Fidrmuc, 2016. "Foreign languages and trade: evidence from a natural experiment," Empirical Economics, Springer, vol. 50(1), pages 31-49, February.
    17. Brooks, Douglas H. & Ferrarini, Benno, 2014. "Vertical gravity," Journal of Asian Economics, Elsevier, vol. 31, pages 1-9.
    18. Bruno, Randolph Luca & Campos, Nauro & Estrin, Saul & Tian, Meng, 2017. "Economic integration, foreign investment and international trade: the effects of membership of the European Union," LSE Research Online Documents on Economics 86615, London School of Economics and Political Science, LSE Library.
    19. Joachim Guilhoto & Jean-Marc Siroën & Ayçil Yücer, 2015. "The gravity model, global value chain and the brazilian states," Working Papers DT/2015/02, DIAL (Développement, Institutions et Mondialisation).
    20. Figueiredo, Erik & Lima, Luiz Renato & Loures, Alexandre & Oliveira, Celina, 2014. "Uma Análise para o Efeito-Fronteira no Brasil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(4), October.
    21. Randolph Bruno & Nauro Campos & Saul Estrin & Meng Tian, 2017. "Economic Integration, Foreign Investment and International Trade: The Effects of Membership of the European Union," CEP Discussion Papers dp1518, Centre for Economic Performance, LSE.
    22. Juan S. Blyde & Christian Volpe Martincus & Danielken Molina, 2014. "Fábricas sincronizadas: América Latina y el Caribe en la era de las Cadenas Globales de Valor," IDB Publications (Books), Inter-American Development Bank, number 86755 edited by Juan S. Blyde, February.
    23. Leticia Blázquez & Carmen Díaz-Mora & Rosario Gandoy, 2012. "Eu Integration And Production Networks," Revista de Economia Aplicada, Universidad de Zaragoza, Departamento de Estructura Economica y Economia Publica, vol. 20(3), pages 5-24, Winter.
    24. Olayinka Idowu Kareem, 2014. "The European Union Sanitary and Phytosanitary Measures and Africa’s Exports," RSCAS Working Papers 2014/98, European University Institute.
    25. repec:bla:worlde:v:40:y:2017:i:5:p:963-977 is not listed on IDEAS

    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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