Download ARTNeT CONFERENCE Parallel Session 4: Empirical trade analysis (2)

ASIA-PACIFIC RESEARCH AND TRAINING NETWORK ON TRADE
ARTNeT CONFERENCE
ARTNeT Trade Economists’ Conference
Trade in the Asian century - delivering on the promise of economic prosperity
22-23rd September 2014
Parallel Session 4:
Empirical trade analysis (2)
www.artnetontrade.org
A New Measure of Economic Distance
Eric Fisher
California Polytechnic State University
John Gilbert
Utah State University
Kathryn Marshall
California Polytechnic State University
Reza Oladi
Utah State University
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Introduction
There has been an explosion of interest in quantifying generalized
trade costs. In this paper we introduce a new measure
Impediments to trade will be reflected in differences in unit costs,
which are (unfortunately) unobservable. We develop a theory
showing how estimates of unit costs can be extracted from the
observable unit value matrix
We apply the technique to a new database of consistent factor uses
across 35 sectors for 39 economies, and explore the results in terms
of network theory, revealed comparative advantage and real
exchange rate theory
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Related Literature
Anderson and van Wincoop (2004) review evidence on various
components of trade costs, and conduct an ‘adding up’ exercise
Hummels and Lugovsky (2006) and Hummels (2007) look at freight
costs
Hummels and Schaur (2013) considers time costs
Chen and Mattoo (2008) and Chen and Novy (2012) provide
evidence on regulation costs
Head and Ries (2001) and Novy (2013) construct indirect aggregate
measures based on gravity (recently applied in Arvis et al., 2013)
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
What is our Measure?
We exploit a simple but deep insight: All impediments to trade will
be reflected in differences in unit costs. Any departure from the law
of one price must reflect an implicit trade cost
Let the unobservable world price of an apple be given
Assume that the local unit cost of a pomme in Paris is 50% above it
and that of an apfel in Berlin is 30% above it, so the cost differential
is 20%.
Do the same calculation for every good recorded in the input-output
tables of France and Germany (this includes traded and non-traded
goods, but we are agnostic about the difference)
The maximum of the absolute value of these differences is a measure
of the economic distance between France and Germany
We can interpret it as the uniform ad-valorem tariff that would shut
down bilateral trade
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Theory
Major Problem: Both the world price and the unit costs are not
directly observable. So how to proceed?
We can observe unit values in the IO tables
If we allow the ancillary assumption that factors are mobile within an
economy, we can recover the factor returns at local prices
If we further assume that the unit value technology matrix defines
unobservable physical units by the unobservable world price, then
unit value matrices record disparate physical technologies
Now, define the unit of each good as one international dollar’s worth
of it
Then the distance from world prices can be computed from the least
squares projection of the unit vector onto the local technology
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Ricardian Example
Good 2
p2 =
(0 . 4
, 1.2 T
)
V2 =
1
3
d(V1 , V2 ) = 0.8
(1,1)
V1 =
T
p1
=
.6)
2, 0
(1.
2
1
Good 1
Figure: Projecting world prices onto local unit values
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Data
Consistent international data on factor use is available from WIOD
We have coverage for 39 countries (roughly 80 percent of world
GDP) and 35 sectors. We have used the 2005 benchmark data
The database contains direct uses for four factors of production
(three skill levels of labor and physical capital)
We are able to construct direct and indirect factor uses per dollar of
output using the IO matrix
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Data Sample
Direct and Indirect Inputs per Dollar in Australia
High-skilled
Med-skilled
Low-skilled
(hours)
(hours)
(hours)
Agriculture
0.0030
0.0102
0.0173
Mining & quarrying
0.0017
0.0047
0.0051
Food & beverages
0.0033
0.0099
0.0128
Textiles & textile products
0.0049
0.0157
0.0175
Leather & footwear
0.0037
0.0106
0.0127
Capital
(dollars)
2.79
2.84
2.11
1.89
3.42
Table: The first five rows of Australia’s unit-value matrix
Local factor prices are estimated at $39 for high skilled labor, $26
for medium skilled, $21 for low skilled and 12% for capital.
Australia is slightly above world unit costs for agriculture and well
above in textiles, but slightly below in food products, and well below
in mining
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Results
We estimate 741 = 38 × 39/2 bilateral distances
The sample average is 1.02, and the median 1.11, with a standard
deviation of 0.47
Considering only those goods usually classified as traded (the first 16
categories in the WIOD tables) the mean, median and standard
deviations are 0.46, 0.51 and 0.22, respectively
The distribution based on only traded goods is significantly more
skewed
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Distribution of Economic Distances
250
200
150
100
50
0
0.0
0.5
1.0
1.5
General economic distances
2.0
2.5
Figure: Bilateral economic distances, as uniform ad valorem tariffs, N = 741
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Distribution of Economic Distances
250
200
150
100
50
0
0.0
0.5
1.0
1.5
2.0
Distances based on traded goods
2.5
Figure: Bilateral economic distances, as uniform ad valorem tariffs, N = 741
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Closest Links Networks
It is useful to consider the bilateral distances using graph theory
The following graphs depict a network with 39 nodes, with the
lengths of the edges representing the bilateral distances
We show the 74 closest links, the country pairs with the most similar
unit costs
Based on overall distance, the world economy consists of one large
component broken into two clusters and several isolated components
The main clusters consists of Europe and North America, the second
Japan and Korea along with large primary product exporters. The
isolated components include India, China and Indonesia
Considering the network based on distances for only the subset of
traded goods, we have only a single large component. China is part
of this component
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Closest Links Overall
TUR
IDN
KOR
BGR
JPN
ESP
LVA
BRA
RUS
AUS
SVK
HUN
IND
POL
MEX
EST
CZE
USA
GBR
SWE
FRA
DEU
BEL
CAN
ITA
NLD
FIN
MLT
LTU
GRC
IRL
AUT
PRT
CYP
DNK
CHN
ROU
SVN
LUX
Figure: Closest 10% of links in economic distance
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Closest Links Traded
POL
RUS
IND
TUR
JPN
HUN
SVK
ROU
IDN
BGR
MEX
ESP
LTU
KOR
BEL
CAN
FRA
CZE
AUS
AUT
SWE
FIN
EST
GRC
PRT
DEU
GBR
USA
IRL
LVA
NLD
ITA
DNK
CHN
BRA
SVN
MLT
LUX
Figure: Closest 10% of links in traded goods distance
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
CYP
Minimum Spanning Tree Networks
The preceding trees were based only on local characteristics, but we
can also examine global characteristics
A completely connected network without any cycles is a tree, a
spanning tree connect all the nodes of a network, the minimum
spanning tree with the minimal cost among all trees spanning a
network
The longest path in the this tree is 14
We are drawn to taxonomic interpretations of the tree
The network for traded goods is quite different from the general
network - so real exchange rates matter
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Minimum Spanning Tree Overall
ROU
BGR
MEX
CHN
AUS
DNK
BRA
AUT
LVA
DEU
CZE
NLD
GBR
EST
POL
FIN
SWE
LTU
BEL
MLT
LUX
IND
CAN
SVK
PRT
IRL
GRC
CYP
IDN
HUN
ESP
JPN
FRA
USA
SVN
TUR
KOR
RUS
ITA
Figure: Minimum spanning tree based on economic distance
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Minimum Spanning Tree Traded Goods
SVN
CYP
POL
IDN
SVK
EST
BGR
IND
CHN
MLT
GRC
CZE
CAN
FRA
BRA
TUR
ESP
PRT
BEL
LVA
ITA
AUT
KOR
JPN
RUS
MEX
FIN
USA
GBR
LUX
DEU
DNK
ROU
HUN
IRL
LTU
NLD
SWE
AUS
Figure: Minimum spanning tree based on traded goods distance
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Balassa-Samuelson Effects
Dispersion of unit costs across sectors is roughly comparable across
countries. Some poorer economies have lower unit costs, but no
discernable pattern among middle/high income
Plotting the real exchange rate reveals a lower projected real
exchange rate for countries with lower productivity
Local unit costs for traded goods show no correlation with
productivity, as predicted
Regressing an index of the real exchange rate with an index of
relative productivity (using the US as the base), we find a
statistically significant Balassa-Samuelson effect. A $10 increase in a
country’s GDP per hour worked is associated with a 1% appreciation
of the real exchange rate
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Unit Cost and Dispersion by Country
1.10
1.05
1.00
MLT
SVN
0.95
IND
Median unit cost
USA
EST
TUR
HUN
0.90
RUS
SVK
CZE
FRA
AUS
PRT
ESP
ROU
LTU
POL
IDN
0.85
BGR
SWE
JPN
CAN
GBR
ITA
KOR
NLD
MEX
AUT
FIN
GRC
LVA
DEU
BEL
DNK
LUX
IRL
0.80
BRA
CYP
0.75
0.70
CHN
0.65
0.60
0
10
20
30
40
50
GDP per hour worked
60
70
Figure: Unit costs by country
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Real Exchange Rates
1.50
Relative price of services to traded goods
1.40
1.30
GBR
IRL
CAN
MEX
1.20
IDN
1.10
RUS
LTU
LVA
PRT
MLT
JPN
AUS
HUN
SVK
EST
POL
TUR
IND
LUX
SWE
ITA
CZE
BEL
NLD
FIN DEU
GRC
BGR
ROU
DNK
AUT
CYP
BRA
1.00
KOR
USA
FRA
ESP
SVN
CHN
0.90
0.80
0.70
0.60
0.50
0
10
20
30
40
50
GDP per hour worked
60
70
Figure: Balassa-Samuelson effects
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Traded Goods Prices
1.20
Average projected unit cost of traded goods
1.10
1.00
TUR
POL
SVK
EST
CZE
IND
0.90
SVN
USA
AUS
SWE
GRC
HUN
ROU
BGR
FRA
ESP
MLT
JPN
LTU
LVA
CHN
RUS
BRA
0.80
MEX
ITA
CAN
PRT
KOR
FIN
DEU
NLD
BEL
GBR
AUT
CYP
LUX
DNK
IRL
IDN
0.70
0.60
0.50
0.40
0
10
20
30
40
50
GDP per hour worked
60
70
Figure: Price of traded goods
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Revealed Comparative Advantage
The Balassa RCA index is simple to construct, but has poor
distributional properties
It is also poorly related to the theoretical concept of comparative
advantage
Because our technique provides estimates of local unit costs, it also
provides a theoretically grounded measure of revealed comparative
advantage
The measure also has the advantage of satisfying both ordinal and
cardinal properties
The main disadvantage is the relatively coarse macroeconomic data
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
Selected Revealed Comparative Advantage Results
Other Manufacturing
Agriculture, Forestry and Fisheries
Leather and Footwear
Wood and Wood Products
Food, Beverages and Tobacco
Pulp, Paper and Printing
Rubber and Plastics
Chemicals and Chemical Products
Mining and Quarrying
Coke and Refined Petroleum
Textiles and Textile Products
Non-metallic Minerals
Electrical Equipment
Transport Equipment
Machinery
Basic and Fabricated Metals
−0.3
−0.2
China
−0.1
0
0.1
0.2
USA
Figure: RCA index for 16 traded goods
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance
0.3
Concluding Comments
A measure of bilateral economic distance is the maximal percentage
difference in unit costs across all sectors of two comparable
economies. Since these are not observable, one must estimate them.
We are the first to observe that the least squares projection of the
unit vector onto a county’s unit-value technology matrix is the
natural estimator for these costs, and to apply the measure
Future work:
Evaluating the evolution of trade costs over time, comparisons to
other trade cost measures
Generalized economic distance rather than geographic distance in
gravity
Endogenous determination of the margin between traded and
non-traded goods
Quantitative theory of the difference between Heckscher-Ohlin and
Ricardian trade
Asia Pacific Trade Economists’ Conference 2014
A New Measure of Economic Distance