Trade in goods and trade in services

Structural gravity modeling has advanced substantially in the last two decades. Trade in merchandise, particularly in manufactures, has either explicitly or implicitly inspired most modeling approaches. In fact, manufactures constitute the largest component of trade, but, according to data reported to the Organization for Economic Cooperation and Development (OECD), trade in services has grown enormously in the last several decades, to the point where it now constitutes about a quarter of total trade involving OECD countries. Our goal in this chapter is to examine basic features of services trade and to ask how well current modeling strategies capture these features. We then propose and quantify extensions to a basic structural gravity model that we think incorporate these features. Our extended model allows us to handle goods trade and services trade in an encompassing framework. Modeling such trade is daunting because traded services include such diverse activities as tourism, financial services, wholesale and retail trade, innovation, and artistic creation. In an attempt to systematize thinking, the General Agreement on Trade in Services (GATS) of the World Trade Organization (WTO) classifies services exports into four modes of supply: