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On Some Effects of International Fragmentation of Production on Comparative Advantages, Trade Flows and the Income of Countries

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  • Salvatore Baldone
  • Fabio Sdogati
  • Lucia Tajoli

Abstract

In traditional trade models, whether based on technological differences or on relative factor endowments, merchandise composition and directions of trade are derived from closed-economy conditions. But nowadays one of the basic assumptions of traditional trade models, i.e. that production processes are integrated within just one country, is being increasingly violated as previously integrated productive activities are segmented and spread over an international network of production sites: as a result, an increasingly large share of trade flows is made up of intermediate and unfinished goods being transferred from one country to another in order to be processed. In this paper we submit that such new configuration of production processes has important effects on at least three dimensions of economic research. First, we show that international disintegration of production processes leads to a lessening of the power of comparative advantages when it comes to explaining both merchandise composition and directions of trade, while it is the concept of absolute advantage to become increasingly relevant; second, we show that empirical measures of revealed comparative advantages are inherently misleading if they do not account for differences in the stage-of-processing of traded goods; third, we estimate a simple model of aggregate demand accounting for international trade in intermediates: results of estimation lend support to our prior that participation of a country in the process of international fragmentation of production plays a specific and significant role in determining its year-over-year change in GDP. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd .

Suggested Citation

  • Salvatore Baldone & Fabio Sdogati & Lucia Tajoli, 2007. "On Some Effects of International Fragmentation of Production on Comparative Advantages, Trade Flows and the Income of Countries," The World Economy, Wiley Blackwell, vol. 30(11), pages 1726-1769, November.
  • Handle: RePEc:bla:worlde:v:30:y:2007:i:11:p:1726-1769
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    References listed on IDEAS

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    1. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, January.
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    Cited by:

    1. Amador, João & Cabral, Sónia, 2008. "International fragmentation of production in the Portuguese economy: What do different measures tell us?," MPRA Paper 9783, University Library of Munich, Germany.
    2. Amador, João & Cabral, Sónia, 2009. "Vertical specialization across the world: A relative measure," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 267-280, December.
    3. Raphael Chiappini, 2012. "Decomposition Internationale Des Processus Productifs Et « Economie De Bazar » :Une Analyse Sur Les Principaux Exportateurs De La Zone Euro," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(2), pages 205-234.
    4. Elia, Stefano & Maggi, Elena & Mariotti, Ilaria, 2011. "Does the transport industry gain from manufacturing internationalization? An empirical investigation on the Italian regions," European Transport \ Trasporti Europei, ISTIEE, Institute for the Study of Transport within the European Economic Integration, issue 49, pages 53-74.
    5. Ari Van Assche & Byron Gangnes, 2010. "Electronics production upgrading: is China exceptional?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(5), pages 477-482.
    6. Amador, João & Cabral, Sónia, 2014. "Global value chains: surveying drivers and measures," Working Paper Series 1739, European Central Bank.
    7. Daria Taglioni & Richard Baldwin, 2014. "Gravity chains: Estimating bilateral trade flows when parts and components trade is important," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 61-82, November.
    8. Elia, Stefano & Maggi, Elena & Mariotti, Ilaria, 2009. "Does the logistics sector gain from manufacturing internationalisation? An empirical investigation on the Italian case," Economics & Statistics Discussion Papers esdp09052, University of Molise, Dept. EGSeI.
    9. Ilaria Mariotti & Simona Montagnana, 2008. "Italian Investments In The Agglomeration Of Timisoara In Romania: Threat Or Opportunity For The Economic Development?," Romanian Journal of Regional Science, Romanian Regional Science Association, vol. 2(2), pages 33-59, December.
    10. Enrique Martínez-Galán & Maria Paula Fontoura, 2016. "GGlobal Value Chains assessment in the 2000s: an approach with income transfers," Working Papers Department of Economics 2016/15, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    11. João Amador & Sónia Cabral, 2014. "Global Value Chains: Surveying Drivers, Measures and Impacts," Working Papers w201403, Banco de Portugal, Economics and Research Department.
    12. Bojnec, Stefan & Ferto, Imre, 2009. "Agro-food trade competitiveness of Central European and Balkan countries," Food Policy, Elsevier, vol. 34(5), pages 417-425, October.
    13. Deborah Winkler & William Milberg, 2011. "Classical and Neoclassical Theories of Offshore Outsourcing," Working Papers 1113, New School for Social Research, Department of Economics.
    14. Enrique Martínez-Galán & Maria Paula Fontoura, 2017. "Labour content of international trade in intermediates: the case of Portugal," Working Papers Department of Economics 2017/16, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F15 - International Economics - - Trade - - - Economic Integration

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