Estimation of Trade Elasticities and Corresponding Welfare Implications for Trade in Intermediate Goods and Trade in Final Goods

  • QI, Steffan (PI)

    Project: Research project

    Project Details


    In the past decades, global trade volumes have grown much faster than global GDP. The surge in global trade can not only be attributed to the global reduction of trade costs, but also to the widespread phenomenon of international fragmented production. Under fragmentation of production, more intermediate goods are traded between countries, and “double counted” in the gross trade volumes.

    The “double counting” of values of intermediate goods in gross trade, when the final product is re-exported, makes estimation of the traditional gravity equation based on gross trade volumes, as well as the implied welfare impact, inaccurate. To address this issue, I propose to build a multi-country, multi-sector general equilibrium model of international fragmented production with inter-country input-output (ICIO) linkage. In the model, there are gains from trade from both trade in intermediate goods and trade in final goods. By allowing the different trade elasticities for trade in intermediate goods and trade in final goods, a more precise evaluation of welfare gains from trade for each country can be carried out.

    The model will allow us to study the following: (1) The driving force of the differences between trade in intermediate goods and trade in final goods in the global trading system. (2) The trade elasticities for trade in intermediate goods and trade in final goods respectively, and their differences. (3) Corresponding gains from trade for each country when fragmentation of production is pervasive. (4) The welfare impacts of trade policies in the world under the international fragmentation of production.

    By studying the above topics, the proposed work helps us to understand more deeply the current world trading system. It is likely to lead to practical implications for the conduct of trade policies of countries, as fragmentation of production has become a key determinant of the current trade landscape.
    Effective start/end date1/01/1831/12/19


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