Academic journal article IUP Journal of Applied Economics

From Trade Deficit in Goods to Trade Surplus in Services: An Eclectic and Extended Gravity Model Approach to Analyzing the Determinants of Service Trade of the United States

Academic journal article IUP Journal of Applied Economics

From Trade Deficit in Goods to Trade Surplus in Services: An Eclectic and Extended Gravity Model Approach to Analyzing the Determinants of Service Trade of the United States

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

While the term 'Industrial Revolution' was used to describe the transition of the world economy from agriculture to industry, the transition of the world economy from manufacture to service can be characterized as 'Service Revolution'. Service sector, also known as the tertiary sector of the economy, comprises a diverse collection of products, known as soft products or intangible activities, such as entertainment, government services, financial services, telecommunication, information technology, healthcare, tourism, and many more. This sector has been lately dominating over the world's economy In recent years, the reliance on services has increased substantially in developed economies. According to the WTO (2005), service output accounts for more than 65% of the world's GDP. That is, the trend in developed countries has been shifting from heavily reliance on manufacturing to a more service-based economy. This transformation was fueled by technological advancements.

Although the weight of the service sector has been growing in the world's economies, the international trade in service might not be catching up according to the latest statistics. WTO has estimated that service trade only accounts for 20% of the global trade. This figure may be underestimated due to the intangible nature of services and the need for the supplier-consumer proximity, which sometime, restrict cross-border trade. Nonetheless, international trade in services has been increasing tremendously since the 1980s, and technological progress, especially the twin developments of Internet and e-commerce, has contributed robustly to it.

US service output was more than $14 tn in 2014, which accounted for almost 68% of the US GDP and 80% of the civilian employment. During the same year, services accounted for $711 bn of the US exports, which accounted for 14.3% of the world's service trade, placing the US as the single largest exporter of service in the world (Fefer, 2015). Although the US has long maintained a trade deficit in goods, it has a significant surplus in service trade. Thus, the objective of this paper is to investigate the factors that influence service trade in the US.

In fact, there has been an extensive array of trade literature that explored the determinants of US goods trade, where the gravity model has been one of the widely recognized models to check for the determinants. However, using this model to analyze the determinants of service trade has been quite limited. Grünfeld and Moxnes (2003), Kimura (2003), and Mirza and Nicoletti (2004) are considered the first attempts to study the determinants of bilateral trade in services. While these studies used gravity model approach in estimating the determinants of bilateral services trade, none of them conducted a separate empirical research to investigate the matter. This paper, thus, is a rigorous attempt to contribute to the limited existing literature by introducing an eclectic and extended gravity model approach, using a set of comprehensive variables, which is introduced, for the first time, in this paper, to analyze the important determinants and characteristics of the service trade of the US.

The paper is organized as follows: initially it provides an overview of service, service trade, and the service trade of the US, followed by a discussion of the existing literature on the application of the gravity model on goods trade and, separately, on service trade. Subsequently, it discusses the methodology and data employed in the paper, followed by a discussion of the results, and finally, the conclusion is offered with some policy recommendations.

Service Trade: Characteristics and Patterns

Due to its intangible nature and the need for producer-consumer proximity, trade in service is subject to more impediments than goods trade. Domestic services markets are strictly regulated by governments. Each country has its own set of qualificational requirements for many service firms and many countries do not accept the quality standards of other countries' service providers. …

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