Gravity with Intermediate Goods Trade
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 use...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Korea Institute for International Economic Policy
2017-12-01
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| Series: | East Asian Economic Review |
| Subjects: | |
| Online Access: | http://dx.doi.org/10.11644/KIEP.EAER.2017.21.4.332 |
| _version_ | 1818834002345197568 |
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| author | Sujin Jang E. Young Song |
| author_facet | Sujin Jang E. Young Song |
| author_sort | Sujin Jang |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-12-19T02:27:53Z |
| format | Article |
| id | doaj.art-11f72e3c744c42289409d0e16985d259 |
| institution | Directory Open Access Journal |
| issn | 2508-1640 2508-1667 |
| language | English |
| last_indexed | 2024-12-19T02:27:53Z |
| publishDate | 2017-12-01 |
| publisher | Korea Institute for International Economic Policy |
| record_format | Article |
| series | East Asian Economic Review |
| spelling | doaj.art-11f72e3c744c42289409d0e16985d2592022-12-21T20:39:50ZengKorea Institute for International Economic PolicyEast Asian Economic Review2508-16402508-16672017-12-01214295315http://dx.doi.org/10.11644/KIEP.EAER.2017.21.4.332Gravity with Intermediate Goods TradeSujin Jang 0E. Young Song 1Metro SeoulE. Young Song 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.http://dx.doi.org/10.11644/KIEP.EAER.2017.21.4.332Gravity EquationGross OutputIntermediate Goods TradeGlobal Value ChainsFragmentation |
| spellingShingle | Sujin Jang E. Young Song Gravity with Intermediate Goods Trade East Asian Economic Review Gravity Equation Gross Output Intermediate Goods Trade Global Value Chains Fragmentation |
| title | Gravity with Intermediate Goods Trade |
| title_full | Gravity with Intermediate Goods Trade |
| title_fullStr | Gravity with Intermediate Goods Trade |
| title_full_unstemmed | Gravity with Intermediate Goods Trade |
| title_short | Gravity with Intermediate Goods Trade |
| title_sort | gravity with intermediate goods trade |
| topic | Gravity Equation Gross Output Intermediate Goods Trade Global Value Chains Fragmentation |
| url | http://dx.doi.org/10.11644/KIEP.EAER.2017.21.4.332 |
| work_keys_str_mv | AT sujinjang gravitywithintermediategoodstrade AT eyoungsong gravitywithintermediategoodstrade |