Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/316528 
Year of Publication: 
2017
Citation: 
[Journal:] East Asian Economic Review (EAER) [ISSN:] 2508-1667 [Volume:] 21 [Issue:] 4 [Year:] 2017 [Pages:] 295-315
Publisher: 
Korea Institute for International Economic Policy (KIEP), Sejong-si
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.
Subjects: 
Gravity Equation
Gross Output
Intermediate Goods Trade
Global Value Chains
Fragmentation
JEL: 
F12
F14
F15
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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