Does the distinction between gross and value‐added exports matter? An empirical investigation of export elasticities

• Author: Janet Ceglowski
• Date: 01 February 2019
• Published date: 01 February 2019
• DOI: http://doi.org/10.1111/roie.12371

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© 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/roie Rev Int Econ. 2019;27:184–200.

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INTRODUCTION

Trade elasticities have long guided policymakers in assessing the likely impact of foreign demand and

exchange rate fluctuations on their exports and domestic production, but in a world of global value chains

(GVCs) an increase in exports may not equate to a one‐to‐one increase in domestic production. Prior to

the emergence of GVCs, exports consisted largely of domestic value added and the distinction between

gross and value‐added trade flows was unimportant for most products. Now, though, the difference can

be significant for exported products that contain large shares of imported inputs. For these products, an

increase in exports induced by a currency depreciation or foreign demand will not translate into an equal

increase in domestic value added and production. GVCs also entail substantial trade in intermediate

products, creating distance between an exporter and the final destination for its goods and services.

There is conflicting empirical evidence about whether this matters for aggregate trade elasticities.

On the one hand, several cross‐country studies find that the price elasticity of gross exports is lower

when GVC participation is higher (Ahmed, Appendino, & Ruta, 2017; Cheng, Hong, Seneviratne, &

Received: 14 July 2017

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Revised: 3 June 2018

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Accepted: 25 June 2018

DOI: 10.1111/roie.12371

ORIGINAL ARTICLE

Does the distinction between gross and value‐added

exports matter? An empirical investigation of export

elasticities

Janet Ceglowski

Economics Department,Bryn Mawr College,

Bryn Mawr, Pennsylvania

Correspondence

Janet Ceglowski, Economics Department,

Bryn Mawr College, Bryn Mawr, PA 19010.

Email: jceglows@brynmawr.edu

Abstract

This study uses bilateral U.S. export data from the OECD’s

Trade in Value‐Added database to estimate and compare

elasticities for three distinct export measures: conven-

tional measures of gross exports, domestic value added in

gross exports, and value‐added exports. It finds little evi-

dence of significant differences in the income elasticities

across the three export measures or in the price elasticities

of gross exports and domestic value added in gross ex-

ports. However it finds a significantly higher price elastic-

ity for value‐added exports, suggesting that conventional

price elasticity estimates may underestimate the impact of

a real dollar depreciation on U.S. exports of value added.

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CEGLOWSKI

van Elkan, 2016), and that the price elasticity has fallen over time as GVCs have grown (Ahmed et

al., 2017). On the other hand, Leigh, Lian, Poplawski‐Ribeiro, and Tsyrennikov (2015) question the

practical significance of GVCs for the relationship between exchange rates, trade prices, and trade

volumes, finding no conclusive evidence that it has weakened over time. With the exception of Ahmed

et al. (2017), however, these studies stop short of directly comparing elasticities for gross and value‐

added exports.

This study asks a simple question: do aggregate trade elasticities estimated with conventional

gross export data provide reasonable proxies for exports of domestic value added? Or are there

significant differences in the elasticities for those two measures of exports? The answer has im-

portant implications for policymakers. As Cheng et al. (2016) argue policymakers should be more

interested in the exchange rate response of domestic value added than gross trade flows because

the former determines international competitiveness and ultimately domestic production. The

same could be said for assessing the domestic production effects of fluctuations in foreign de-

mand. Until recently, there were few alternatives to gross flows as metrics of trade for empirical

research. Consequently, most existing elasticity estimates are based on gross trade flows, but as

new estimates of value‐added trade have become available, they have opened the possibility of

estimating value‐added trade elasticities. Taking the question directly to the data can provide some

insights into whether the distinction between gross and value‐added trade flows matters for export

elasticities.

Using bilateral U.S. trade data from the OECD’s Trade in Value‐Added (TiVA) database, this

study estimates and compares average export elasticities for several measures of aggregate gross and

value‐added exports, directly testing for differences in the estimated elasticities. It finds little evidence

of significant differences in the income elasticities across export measures. It also finds no difference

in the price elasticities between gross exports and domestic value added in gross exports, but it does

find that the price elasticity of value‐added exports is higher than the elasticity of gross exports. The

difference is significant both statistically and economically. It is found in exports of total goods and

services, as well as separate estimates for exports of goods, services, and manufactures. Thus, while

income elasticity estimates for gross exports are reasonable proxies for value‐added exports, price

elasticities for gross exports appear to underestimate the impact of exchange rate and relative price

changes on U.S. value‐added exports.

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GVCs AND AGGREGATE TRADE ELASTICITIES

When trade consists of final exports produced with domestic value added, trade elasticities meas-

ure the effects of income and relative prices on the demand for those final products and, implic-

itly, the domestic value added they contain. GVCs complicate this conventional characterization

of trade and trade elasticities. The emergence and development of GVCs have transformed pro-

duction and amplified international trade flows as intermediate products cross national borders,

sometimes multiple times, before assembly into final products for possible export. Because con-

ventional export statistics record gross flows, they consist of both domestic value added and

any imported value added. They also include exports of intermediate products as well as final

products.

Several recent studies have posited that greater participation in GVCs could lower the price elas-

ticity of exports via backward and forward linkages. With backward linkages a currency depreciation

raises the cost of imported inputs, mitigating the depreciation’s impact on foreign‐currency export