Articles in Monthly Bulletin

  1. Research Papers
  2. Periodicals
  3. Monthly
  4. Articles in Monthly Bulletin

[2022-11] Incidence Analysis of Balance of Trade: The Comparison of Gross Value-Added and Income Trade

Group : Macro Economy
Research Department (02-759-4150) 2023.01.10 14608

The gains from trade can be identified through the balance of trade. The balance of trade statistics that are generally used are drawn up using a simple aggregate method where all goods exports and imports that cross borders are compiled, regardless of what production process they go through (on a gross basis). However, as global production chains have become more sophisticated and as multinational companies have been growing rapidly, the need has been raised for compiling trade statistics based on the value-added generated from the global division in production (on a value-added basis). For example, suppose the final goods exported from one country contain intermediate goods imported from other countries. In that case, the difference between the export of final goods and the import of intermediate goods represents better the gains from trade. In addition, recent studies have argued that trade gains should be measured to reflect the globalization of production factors, such as an increase in foreign laborers. If production factors from various nationalities are used in producing tradable goods, the trade gains should be calculated by breaking down incomes distributed to production factors by nationality, and then adding them up by nation once again (on an income basis).

 

This paper calculates the balance of trade using value-added and income-based trade concepts whose importance has recently attracted more attention. We compare them with the traditional gross-based balance of trade and draw policy implications.

 

A comparison between 2014 and 2020 shows that among Korea’s trading partners, the share of countries with lower value-added or incomes than gains on a gross basis declined, while the share of countries with higher value-added increased. By country, Korea’s trade surplus with China was smaller on value-added and income bases than on a gross basis. However, Korea’s trade surplus with the U.S. was larger on value-added and income bases than on a gross basis. Therefore, if we calculate gains from trade only on a gross basis, we should be mindful that this can be quite different from the gains on a value-added or income basis.


In the meantime, we analyzed the bilateral trade balance of Korea’s major trading partners. We found that China’s trade with the U.S. saw the generation of value-added and income grow in 2020 compared to 2014. This implies that China’s role in global production shifted from simply delivering exports to the U.S. to gaining value-added from the U.S.

The global trade environment is changing rapidly due to changes in the industrial structure after COVID-19, trade conflicts between the U.S. and China, and the war in Ukraine. Under these circumstances, it is necessary to continously monitor the balance of trade, not only on a gross basis, but also on value-added and income bases, which can help assess the gains and losses of trade from multiple perspectives, and then to use them in setting up trade policies. 

top