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

Richard Baldwin and Daria Taglioni ()

No 1401, Working Paper Series from European Central Bank

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

Keywords: bilateral flows; gravity; parts and components trade; Value chains (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-int
Note: 337831
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (69)

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Related works:
Journal Article: Gravity chains: Estimating bilateral trade flows when parts and components trade is important (2014)
Working Paper: Gravity Chains: Estimating Bilateral Trade Flows When Parts And Components Trade Is Important (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111401

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