Intermediate Products: The Inter-Industry Flows

Until now we have assumed that goods are produced with the help of primary factors only, but since in practice much of the production activity would come to a halt if there were no intermediate products — goods which are produced to be used as inputs in other goods — this assumption, although a convenient one, is very unrealistic. There is hardly any justification for this assumption, even though the bulk of trade theory has ignored the presence of material inputs which constitute a very large proportion of the total volume of world trade.† It is only recently that trade theorists have come to recognise the importance of intermediate products in the production process, but even here the general tendency has been to defend the neglect of the treatment of material inputs in the earlier literature. In his book on trade theory, for example, Kemp ([7], p. 148), citing Vanek [10], defends the neglect of the incorporation of intermediate goods in earlier trade theory. In some respect, this neglect may be justified. Many properties of the general equilibrium model presented in the previous chapters carry over to the model with intermediate goods. However, there are some crucial differences which have not been recognised before. The analysis of such similarities and differences is the subject-matter of this chapter.