Gravity Chains: Estimating bilateral trade flows when parts and components trade is important
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 implicat...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
University of Warsaw
2014-11-01
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| Series: | Journal of Banking and Financial Economics |
| Subjects: | |
| Online Access: | https://press.wz.uw.edu.pl/cgi/viewcontent.cgi?article=1097&context=jbfe |
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| Summary: | 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 the 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. |
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| ISSN: | 2353-6845 |