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Gravity with Intermediate Goods Trade

Author

Listed:
  • Sujin, Sujin

    (Metro Seoul)

  • Song, E. Young

    (Sogang University)

Abstract

This paper derives the gravity equation with intermediate goods trade. We extend a standard monopolistic competition model to incorporate intermediate goods trade, and show that the gravity equation with intermediates trade is identical to the one without it except in that gross output should be used as the output measure instead of value added. We also show that the output elasticity of trade is significantly underestimated when value added is used as the output measure. This implies that with the conventional gravity equation, the contribution of output growth can be substantially underestimated and the role of trade costs reduction can be exaggerated in explaining trade expansion, as we demonstrate for the case of Korea's trade growth between 1995 and 2007.

Suggested Citation

  • Sujin, Sujin & Song, E. Young, 2017. "Gravity with Intermediate Goods Trade," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 21(4), pages 295-315, December.
    • Handle: RePEc:ris:eaerev:0332
    DOI: 10.11644/KIEP.EAER.2017.21.4.332
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    Citations

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    Cited by:

    1. Virginia Di Nino & Anna Ekstam, 2020. "What value added in the trade balances of euro area financial centres?," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Bridging measurement challenges and analytical needs of external statistics: evolution or revolution?, volume 52, Bank for International Settlements.
    2. Theresa M. Greaney & Kozo Kiyota, 2020. "The gravity model and trade in intermediate inputs," The World Economy, Wiley Blackwell, vol. 43(8), pages 2034-2049, August.

    More about this item

    Keywords

    Gravity Equation; Gross Output; Intermediate Goods Trade; Global Value Chains; Fragmentation;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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