Trade in Goods and Trade in Services

This chapter examines basic features of services trade and asks how well current modeling strategies capture the features. It then proposes and quantifies extensions to a basic structural gravity model that incorporate these features. The extended model allows people to handle goods trade and services trade in an encompassing framework. The chapter presents some basic facts about services trade and some quantitative implications of the model. Tangible goods are sold in country n at a markup over the cost of the inputs used to produce them. A result of the competition is that the low-cost producer of a variety serves the market and its price equals either the cost of the second lowest-cost potential supplier of that variety to market n or the monopoly price, whichever is lower. Ultimately, the value of intangible services will flow in the form of royalties to the country whose intangible sector generated the intangible assets.