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Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development

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  • Charles I. Jones

Abstract

Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to several old ideas in development economics and proposes that linkages, complementarity, and superstar effects are at the heart of the explanation. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods' share of revenue is about 1/2, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. Finally, the high elasticity of substitution associated with final consumption delivers a superstar effect: GDP depends disproportionately on the highest levels of productivity in the economy. This paper builds a model with links across sectors, complementary inputs, and highly substitutable consumption, and shows that it can easily generate 50-fold aggregate income differences.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13834.

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Date of creation: Mar 2008
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Publication status: published as "Intermediate Goods and Weak Links in the Theory of Economic Development" American Economic Journal: Macroeconomics, April 2011, Vol. 3 (2), pp. 1-28.
Handle: RePEc:nbr:nberwo:13834

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Cited by:
  1. Estevadeordal, Antoni & Taylor, Alan M, 2008. "Is the Washington Consensus Dead? Growth, Openness, and the Great Liberalization, 1970s-2000s," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6942, C.E.P.R. Discussion Papers.
  2. Julian di Giovanni & Andrei A. Levchenko, 2009. "Firm Entry, Trade, and Welfare in Zipf's World," Working Papers, Research Seminar in International Economics, University of Michigan 591, Research Seminar in International Economics, University of Michigan.
  3. Susanto Basu & John G. Fernald, 2009. "What do we know (and not know) about potential output?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 187-214.
  4. Michael E. Waugh, 2010. "International Trade and Income Differences," American Economic Review, American Economic Association, American Economic Association, vol. 100(5), pages 2093-2124, December.
  5. Abbott, Philip & Andersen, Thomas Barnebeck & Tarp, Finn, 2010. "IMF and economic reform in developing countries," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 50(1), pages 17-26, February.
  6. Areendam Chanda & Beatrice Farkas, 2009. "Technology-Skill Complementarity and International TFP Differences," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c014_028, DEGIT, Dynamics, Economic Growth, and International Trade.
  7. Shuhei, Aoki, 2008. "Inverse Ramsey Problem of the Resource Misallocation Effect on Aggregate Productivity," MPRA Paper 7930, University Library of Munich, Germany.
  8. Sharma, Chandan, 2011. "Imported intermediary inputs, R&D and Firm's Productivity: Evidence from Indian Manufacturing," Proceedings of the German Development Economics Conference, Berlin 2011, Verein für Socialpolitik, Research Committee Development Economics 74, Verein für Socialpolitik, Research Committee Development Economics.

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