Seminar Series: Abstract

2.00
September 01 2009
Seminar Room B (Arndt Room)

Global production sharing: Implications for the Measurement of Price Elasticities in International Trade
Prema-chandra Athukorala, RSPAS

Global production sharing—the breakup of the production process a good or service into vertically separated stages to be carried out in two or more countries—has become a defining characteristics of world trade over the past few decades. As the scale of activities in a vertically integrated production process expands, opportunities for reducing costs are created by locating parts of the production process based on their relative cost of production. This has resulted in a steady rise in trade in parts and components and assembled final products across national borders. The purpose of this study to probe implications of the dichotomy between trade in parts and components and final goods for analyzing determinants of trade flows. The findings yield the inference that parts and components are remarkable less sensitive to changes relative prices and consequently the sensitivity of aggregate trade flows to relative prices tends to diminish as trade cuts ever more rapidly into the production process. This inference casts doubt on the reliability to economic forecasts based on the conventional approach to trade flow modeling which treat treats parts and components and finals goods as a unified, homogeneous product.