Page 54 - Special Topic Session (STS) - Volume 2

STS452 Joseph M.
3. Value added approach to analysing trade data
The cost of production or purchase of commodities forms the basis for the
conventional presentation and analysis of the statistics on trade. However, as
discussed earlier, such an approach has limited analytical utility in an economic
environment characterized by highly fragmented production processes
distributed globally. In particular, the actual contribution of an economy, or a
given sector of an economy, to the production of a commodity is not readily
discernible. Hence, a more insightful and analytical illustration of the data is
needed to fully understand the state and dynamics of modern day trade, and
its correlation to international production-sharing arrangements. The last
section showed that the input–output framework provides the right setting for
a quantitative exploration of trade and trade patterns and linkages. This
section delves deeper into the framework to extract a mechanism for
decomposing the total or gross value of a commodity according to where its
componential values are created (added). Figure 4.1 elaborates on the IOT
example provided in Figure 3.1 by denoting the complete set of transactions
possible within the economic framework provided therein. The sector specific
production technologies depicted in industrial sector columns can be
represented by a system of equations as follows:

p11X1 + p21X2 + p31X3 + V1 = X1
p21X1 + p22X2 + p23X3 + V2 = X2
p31X1 + p32X2 + p33X3 + V3 = X3
Where 0≤pij<1 and Vj>0.
The solution to the system of equations for Xj shows that the output of
sector j, and hence its imports and exports, can be completely decomposed
as the value added terms Vj of all the industrial sectors.

Figure 4.1: Input Output Transaction Table

By decomposing output in value added terms, one can quantify the
contribution of each sector, and that of the territory where it is located, in the

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