Why is Manufacturing Trade Rising Even as Manufacturing Output is Falling?

15 Pages Posted: 8 Jun 2006

See all articles by Raphael Bergoeing

Raphael Bergoeing

affiliation not provided to SSRN

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Vanessa Strauss-Kahn

INSEAD - Economics and Political Sciences

Kei-Mu Yi

University of Houston - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: January 2004

Abstract

For the OECD as whole, as well as for the U.S., manufacturing exports have been rising, while manufacturing output (both expressed as a share of total GDP) has been falling.

We examine the prevalence of this puzzling fact across individual OECD countries, as well as for particular sub-industries of manufacturing. We then address whether the standard international trade paradigms are capable of quantitatively resolving the puzzle.

We extend the basic monopolistic competition-cum-Heckscher-Ohlin model to allow for non-homothetic preferences, non-unitary demand elasticities and for changing trade barriers and country-size distributions over time. In a calibrated version of the model, we find that while the extended model can replicate the puzzle qualitatively, it cannot do so quantitatively. We suggest that the unexplained part of the puzzle may be due to vertical specialization - the phenomenon by which countries specialize in particular stages of a good's production sequence - leading to "back-and-forth" trade, and creating a distinction between 'gross' trade and value-added trade. The standard trade paradigms only include value-added trade.

Keywords: Manufacturing

JEL Classification: F1, F4

Suggested Citation

Bergoeing, Raphael and Kehoe, Timothy J. and Strauss-Kahn, Vanessa and Yi, Kei-Mu, Why is Manufacturing Trade Rising Even as Manufacturing Output is Falling? (January 2004). FRB of Philadelphia Working Paper No. 04-4. Available at SSRN: https://ssrn.com/abstract=907111 or http://dx.doi.org/10.2139/ssrn.907111

Raphael Bergoeing

affiliation not provided to SSRN ( email )

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
1169 Management & Economics
Minneapolis, MN 55455
United States
612-625-1589 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vanessa Strauss-Kahn

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4239 (Phone)

Kei-Mu Yi (Contact Author)

University of Houston - Department of Economics

Houston, TX 77204-5882
United States

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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