The Gravity Model and Trade in Intermediate Inputs

Theresa Greaney and Kozo Kiyota

No 2020-002, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: Is the gravity model as applicable to trade in intermediate inputs as it is to trade in final goods? One of the contributions of this paper is that we explicitly account for the dual nature of products that can be used as either intermediate inputs or final goods. We find that the structural gravity model performs extremely well for describing bilateral trade in final goods and in intermediate inputs. Moreover, this continues to hold even when we focus on a subset of countries in which intermediate inputs trade accounts for a growing share of trade, namely 'Factory Asia'. However, the gravity model may perform poorly due to model misspecification (i.e., exclusion of intranational trade) and/or sample selection, even after the model considers the dual nature of products. We demonstrate that the poor performance of the gravity model is not attributable to the large trade flow of intermediate inputs, which supports the continued use of the model as these trade flows continue to grow in importance worldwide.

Keywords: Structural gravity model; Intermediate inputs; Intranational trade; Factory Asia (search for similar items in EconPapers)
JEL-codes: F14 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2020-01-21
New Economics Papers: this item is included in nep-int and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: The gravity model and trade in intermediate inputs (2020)
Working Paper: The Gravity Model and Trade in Intermediate Inputs (2020)
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