find strong changes in revealed comparative advantages of the EU when based on our new measures rather than gross exports. European GVC income is increasing fastest in activities carried out in the production of non-electrical machinery and transport equipment, while growing much more slowly in activities related to the production of non-durables. These findings seem to be more in line with expectations than the suggestion of stagnant patterns of comparative advantage based on gross export data.

In contrast to popular fear, we do not find that international fragmentation necessarily leads to destruction of jobs in advanced countries. Indeed, we do find a declining number of manufactures GVC jobs located in the manufacturing sector, a phenomenon that is often highlighted in the popular press. But in most countries this was more than counteracted by a steady increase in the number of GVC jobs in the services sector. In fact, in 2008 almost half of the GVC jobs were in non-manufacturing sectors. A myopic approach to policies focusing on the manufacturing sector only is missing out on this important trend.

Finally, delving more deeply in the skill-intensity of the jobs involved, we do find large distributional shifts. Fragmentation seems to be related to a magnification of comparative advantages as European countries increasingly specialize in activities that require more skilled workers. GVC income shares for high-skilled workers increase much faster than those for medium- and low-skilled workers. And this increase is also faster than the increase in supply of high-skilled workers in the overall economy. Surprisingly, we find this pattern for both the old and new EU members, reminiscent of the findings for Mexico-US integration in the 1990s (Feenstra 1998, 2010).

How do our measures compare to more conventional indicators of competitiveness? It is important to note that a country’s share in manufactures GVC income indicates its competitive strength in a particular set of activities, namely those directly and indirectly related to the production of final manufactures. This includes activities in the manufacturing sector itself but also in supporting industries such as business, transport and communication and finance services through the delivery of intermediate inputs. These indirect contributions will be explicitly accounted for through the modelling of inputoutput linkages across sectors. Manufactures GVC income is thus not synonymous with manufacturing competitiveness as it excludes those activities in manufacturing involved in the production of nonmanufacturing final goods and services (e.g. cement used in house construction) and includes some nonmanufacturing activities. Summed across all countries manufactures GVC income will equal global final expenditure on manufactures.<sup>2</sup> It is also not the same as overall competitiveness in international trade of a country as it does not cover all international trade flows (e.g. exports of final non-manufacturing goods and services), as will be discussed in more detail below. In addition, GVC incomes measure competitiveness of the domestic economy, i.e. based on activities carried out on the domestic territory of a country, rather than the national economy which would be based on the ownership of the production factors involved. This difference is typically small for employment, as labor migration is still limited and value added by domestic labor in a country will accrue as national income. Thus differences in the number of domestic and national GVC jobs will be small. But this is not necessarily true for value added

> 2 Herrendorf, Rogerson and Valentinyi (2011) provide a related discussion of what they call the “consumption value added” and the “final consumption expenditure” perspectives. Our approach follows the former.

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