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

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Author Info
Charles I. Jones

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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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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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Handle: RePEc:nbr:nberwo:13834

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Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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References listed on IDEAS
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  31. Andres Erosa & Tatyana Koreshkova & Diego Restuccia, 2006. "On the aggregate and distributional implications of productivity differences across countries," Working Paper 06-02, Federal Reserve Bank of Richmond. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aoki, Shuhei, 2008. "Inverse Ramsey Problem of the Resource Misallocation Effect on Aggregate Productivity," MPRA Paper 7930, University Library of Munich, Germany, revised 07 Oct 2008. [Downloadable!]
  2. Susanto Basu & John G. Fernald, 2009. "What do we know and not know about potential output?," Working Paper Series 2009-05, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
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