The Factor Content of Trade:Global trends since 1995

Abdul A. Erumban

Marcel P. Timmer

Gaaitzen J. de Vries

University of Groningen

WIOD conference,

Vienna, 26-28 May 2010

This project is funded by the European Commission, Research Directorate General as part of the 7th Framework Programme, Theme 8: Socio-Economic Sciences and Humanities.

Grant Agreement no: 225 281

Aim of this paper

Measure the factor content of imports and exports by country

Relevant for many important policy questions:

Who benefits from the stimulus package for car manufacturers in Europe?

Who is adding the ‘brains’ to electronic products, and is this changing over time?

Is a country upgrading the skill-content of its exports? Or which exported products see an increase in the skill-content?

Aim of this paper

Measure the factor content of trade for

• The 40 countries in WIOD• The period 1995-2006

Distinguish production factors: ICT and non-ICT capital, low-, medium-, and high-skilled employment

Allow for trade in intermediate inputs

Allow for differences in technology across countries (e.g. because of factor price differences)

Global production unbundling for the hard-disc drive

Related literature

• Studies related to the effectiveness of import-substitution policies (e.g. Syrquin and Urata 1986 JDE; Chenery, Robinson, and Syrquin 1986) (as well as for projection and forecasting purposes)

• Vertical specialization (Gourevitch 2000 WD; Hummels et al. 2001, JIE)

• Factor content of trade, testing Heckscher-Ohlin-Vanek predictions (Dietzenbacher and van der Linden 1995 JRS; Davis and Weinstein 2001 AER; Reimer 2006 JIE; Johnson 2008; Trefler and Zhu 2010 JIE; Johnson and Noguera 2010 JIE; Feenstra and Hong 2007 NBER)

Data (1)

Data requirements to measure the factor content of trade: By country for the period 1995-2006:

Supply and Use tables AM, the N x N imported coefficient matrices AD, the N x N domestic coefficient matrices

Bilateral trade data WORLD KLEMS database

By country and industry for the period 1995-2006: Capital compensation by industry Low-, medium-, and high-skilled employment

PPPs (current version uses exchange rates)

Data (2)

Major data steps:• Obtain and harmonize official Supply and Use tables.• Benchmark SUTs on the national accounts and

inter/extrapolate SUTs using the SUTRAS program (Temurshoev and Timmer 2010).

• Construction of a KLEMS database for non-EU countries• Construction of global input-output matrix using imported

coefficient matrix and bec classification

Methodology (1)

• Net output of goods N for country C:

yC = xC

- A xC (1)

where, yC is net output (NC x 1), xC is an (NC x 1) gross output vector, and A is an interregional input-output matrix of dimension (NC x NC)

• Trade in goods:tC = yC – dC (2)

where tC represents country C’s exports of goods (NC x 1) for intermediate or final use, and dC is demand for final use.

Methodology (2)

• Define a total factor input matrix:

B* = B ( I – A)-1 (3)

Where B is a direct factor input matrix (F x NC), I an identity matrix, and B* the total factor input matrix.

• The Measured Factor Content of Trade (MFCT) for country C is:

B*tC= B*yC – B*dC (4)

Results for the USA (1995)

(in billions of euros)ICT

capitalNon-ICT capital

Low-skilled empl.

Medium-skilled empl.

High-skilled empl.

Total United States net exports 11,548 53,042 (43,439) 54,993 71,106

USA imports for USA production 5,684 41,240 31,789 44,959 26,623

USA imports for USA final use 5,597 39,797 32,872 44,718 26,033

USA exports for GER production 671 3,940 584 4,096 3,679

USA exports for GER final use 383 2,273 375 2,409 2,086

USA exports for JPN production 1,114 8,528 1,434 8,092 6,142

USA exports for JPN final use 680 5,380 962 5,329 3,892

USA exports forROW production 13,558 74,397 10,764 79,772 71,801

USA exports for ROW final use 6,423 39,561 7,103 44,973 36,162

Results for the USA (1995)

(in billions of euros)ICT

capitalNon-ICT capital

Low-skilled empl.

Medium-skilled empl.

High-skilled empl.

Total United States net exports 11,548 53,042 (43,439) 54,993 71,106

USA imports for USA production 5,684 41,240 31,789 44,959 26,623

USA imports for USA final use 5,597 39,797 32,872 44,718 26,033

USA exports for GER production 671 3,940 584 4,096 3,679

USA exports for GER final use 383 2,273 375 2,409 2,086

USA exports for JPN production 1,114 8,528 1,434 8,092 6,142

USA exports for JPN final use 680 5,380 962 5,329 3,892

USA exports forROW production 13,558 74,397 10,764 79,772 71,801

USA exports for ROW final use 6,423 39,561 7,103 44,973 36,162

Results for the USA (1995)

(in billions of euros)ICT

capitalNon-ICT capital

Low-skilled empl.

High-skilled empl.

Shares (product. or final use)

Total United States net exports 11,548 53,042 (43,439) 71,106

USA exports for GER production 671 3,940 584 3,679 64%

USA exports for GER final use 383 2,273 375 2,086 36%

USA exports for JPN production 1,114 8,528 1,434 6,142 61%

USA exports for JPN final use 680 5,380 962 3,892 39%

USA exports for ROW production 13,558 74,397 10,764 71,801 67%

USA exports for ROW final use 6,423 39,561 7,103 36,162 33%

USA and JAPAN (1995)

(in billions of euros)  

ICT capital

Non-ICT capital

Low-skilled empl.

Medium-skilled empl.

High-skilled empl.

Total United States net exports 11.548 53.042 (43.439) 54.993 71.106

Total Japan net exports 5.302 58.216 3.860 55.512 16.190

Difference   6.247 (5.174) (47.299) (519) 54.917

Concluding remarks

• USA relatively large exporter of IT capital and high-skilled employment compared to Japan in 1995

• Much further data work is needed (interregional table for 40 WIOD countries, factor content for non-EU countries)

• Measure factor content using volumes instead of values• Methodologically advance using price indices

• Many applications for policy analysis appear feasible.

Additional material

Results for Japan (1995)

(in billions of euros)ICT

capitalNon-ICT capital

Low-skilled empl.

Medium-skilled empl.

High-skilled empl.

Total Japan net exports 5,302 58,216 3,860 55,512 16,190

JPN imports for JPN production 3,969 26,968 15,278 26,661 18,986

JPN imports for JPN final use 2,041 14,241 7,988 14,767 10,231

JPN exports for GER production 336 2,488 638 2,464 1,249

JPN exports for GER final use 311 2,581 706 2,557 1,206

JPN exports for USA production 1,441 13,250 3,712 12,921 5,867

JPN exports for USA final use 1,513 13,159 3,727 13,312 6,040

JPN exports for

ROW production 4,288 39,005 10,489 37,366 17,706

JPN exports for ROW final use 3,422 28,942 7,855 28,321 13,341

Results for Japan (1995)

(in billions of euros)ICT

capitalNon-ICT capital

Low-skilled empl.

Medium-skilled empl.

High-skilled empl.

Total Japan net exports 5,302 58,216 3,860 55,512 16,190

JPN imports for JPN production 3,969 26,968 15,278 26,661 18,986

JPN imports for JPN final use 2,041 14,241 7,988 14,767 10,231

JPN exports for GER production 336 2,488 638 2,464 1,249

JPN exports for GER final use 311 2,581 706 2,557 1,206

JPN exports for USA production 1,441 13,250 3,712 12,921 5,867

JPN exports for USA final use 1,513 13,159 3,727 13,312 6,040

JPN exports for

ROW production 4,288 39,005 10,489 37,366 17,706

JPN exports for ROW final use 3,422 28,942 7,855 28,321 13,341

Results for Japan (1995)

(in billions of euros)ICT

capitalNon-ICT capital

Low-skilled empl.

Medium-skilled empl.

High-skilled empl.

Total Japan net exports 5,302 58,216 3,860 55,512 16,190

JPN imports for JPN production 3,969 26,968 15,278 26,661 18,986

JPN imports for JPN final use 2,041 14,241 7,988 14,767 10,231

JPN exports for GER production 336 2,488 638 2,464 1,249

JPN exports for GER final use 311 2,581 706 2,557 1,206

JPN exports for USA production 1,441 13,250 3,712 12,921 5,867

JPN exports for USA final use 1,513 13,159 3,727 13,312 6,040

JPN exports for

ROW production 4,288 39,005 10,489 37,366 17,706

JPN exports for ROW final use 3,422 28,942 7,855 28,321 13,341