Measuring trade in value added: how valid is the proportionality assumption?

Crawford School of Public Policy | Arndt-Corden Department of Economics

Event details

ACDE Seminar

Date & time

Tuesday 25 July 2017
2.15pm–3.45pm

Venue

Seminar Room C, Coombs Building, Fellows Road, ANU

Speaker

Arianto Patunru, Arndt-Corden Department of Economics, Crawford School, ANU.

Trade flow analyses based on gross data overstate the domestic value added of exports in the presence of imported intermediates. Measuring domestic and foreign value added of exports using input-output tables has thus become a new trend. This requires separate domestic and imported intermediate tables. Since many countries only have aggregate intermediate input matrices, value added exports are estimated by applying the ‘proportionality assumption’ that import content share of domestic sales of a given industry is equal to that of its exports. We test the validity of this assumption using IO tables of Indonesia, Malaysia, Taiwan and Australia, which contain separate tables. We find that the foreign content of export is underestimated by the proportionality assumption. The differences between the two measures are larger in countries well integrated into the global production network. And the discrepancy is in general greater for manufacturing exports, implying that as the economy becomes diversified into manufacturing from primary production, the validity of the proportionality assumption becomes more unrealistic.

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