Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153834
Authors: 
Baldwin, Richard
Taglioni, Daria
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1401
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.
Subjects: 
bilateral flows
gravity
parts and components trade
Value chains
JEL: 
F01
F10
Document Type: 
Working Paper

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