Why do we care?
For most policy issues, it is vital to measure the extent of domestic content in exports. For instance, what is the result of a currency appreciation on a country’s exports? The answer depends crucially on the share of domestic content in the country’s exports. Other activities equal, confirmed exchange rate appreciation could have a smaller influence on trade volume, the low the share of domestic content in the exports.
As another example, what is the result of trading with China on European income inequality? The answer depends partly on whether China simply exports products that are intensive in low-skilled labour or whether China’s exports are more sophisticated. Dani Rodrik has noted that the per capita income typically linked to the sort of goods bundle that China exports is a lot greater than China’s actual income. He interprets this as evidence that the skill content of China’s exports may very well be higher than its endowment may imply. Peter Schott has documented an apparently fast upsurge in the similarity between your Chinese export structure and that of high-income countries, and interprets it as proof a rise in the amount of sophistication embedded in Chinese exports. However, if the domestic content in China’s exports is low, especially in sectors that could have already been considered sophisticated or high-skilled in america, then imports from China may still generate a big downward strain on the wage of the low-skilled Americans in the end (as described by Paul Krugman).