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An Elementary Theory of Global Supply Chains

  • Arnaud Costinot
  • Jonathan E. Vogel
  • Su Wang

This paper develops an elementary theory of global supply chains. We consider a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods, and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Because of the sequential nature of production, absolute productivity differences are a source of comparative advantage among nations. Using this simple theoretical framework, we offer a first look at how vertical specialization shapes the interdependence of nations.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-03/cesifo1_wp3402.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3402.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3402
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  1. Luis Garicano & Esteban Rossi-Hansberg, 2005. "Organization and Inequality in a Knowledge Economy," NBER Working Papers 11458, National Bureau of Economic Research, Inc.
  2. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  3. Richard Baldwin & Frederic Robert-Nicoud, 2007. "Offshoring: General Equilibrium Effects on Wages, Production and Trade," NBER Working Papers 12991, National Bureau of Economic Research, Inc.
  4. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  5. Sly, Nicholas, 2008. "Labor Matching Behavior in Open Economies and Trade Adjustment," MPRA Paper 25693, University Library of Munich, Germany, revised Oct 2010.
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  7. Monte, Ferdinando, 2009. "Skill Bias, Trade, and Wage Dispersion," MPRA Paper 14719, University Library of Munich, Germany.
  8. Volker Nocke & Stephen Yeaple, 2008. "An Assignment Theory of Foreign Direct Investment," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 529-557.
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  10. Emily Blanchard & Gerald Willmann, 2013. "Trade, Education, and the Shrinking Middle Class," CESifo Working Paper Series 4141, CESifo Group Munich.
  11. Rossi-Hansberg, Esteban & Garicano, Luis & Antras, Pol, 2006. "Offshoring in a Knowledge Economy," Scholarly Articles 3196323, Harvard University Department of Economics.
  12. Baldwin, Richard & Venables, Anthony J, 2010. "Spiders and Snakes: Offshoring and Agglomeration in the Global Economy," CEPR Discussion Papers 8163, C.E.P.R. Discussion Papers.
  13. Robert C. Feenstra & Gordon H. Hanson, 1996. "Globalization, Outsourcing, and Wage Inequality," NBER Working Papers 5424, National Bureau of Economic Research, Inc.
  14. David Hummels & Peter J. Klenow, 2002. "The Variety and Quality of a Nation's Trade," NBER Working Papers 8712, National Bureau of Economic Research, Inc.
  15. Ariel Burstein & Christopher Kurz & Linda Tesar, 2008. "Trade, Production Sharing, and the International Transmission of Business Cycles," NBER Working Papers 13731, National Bureau of Economic Research, Inc.
  16. David Levine, 2012. "Production Chains," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 271-282, July.
  17. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
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  19. Markusen, James R, 1986. "Explaining the Volume of Trade: An Eclectic Approach," American Economic Review, American Economic Association, vol. 76(5), pages 1002-11, December.
  20. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
  21. Franziska Ohnsorge & Daniel Trefler, 2007. "Sorting It Out: International Trade with Heterogeneous Workers," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 868-892, October.
  22. Arnaud Costinot, 2009. "An Elementary Theory of Comparative Advantage," Econometrica, Econometric Society, vol. 77(4), pages 1165-1192, 07.
  23. Paul R. Bergin & Robert C. Feenstra & Gordon H. Hanson, 2009. "Offshoring and Volatility: Evidence from Mexico's Maquiladora Industry," American Economic Review, American Economic Association, vol. 99(4), pages 1664-71, September.
  24. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  25. Juan Carlos Hallak & Peter K. Schott, 2011. "Estimating Cross-Country Differences in Product Quality," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 417-474.
  26. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
  27. Arnaud Costinot & Jonathan Vogel, 2009. "Matching and Inequality in the World Economy," NBER Working Papers 14672, National Bureau of Economic Research, Inc.
  28. Egger, Hartmut & Falkinger, Josef, 2003. "The distributional effects of international outsourcing in a 2 x 2 production model," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 189-206, August.
  29. Juan Carlos Hallak, 2006. "A Product-Quality View of the Linder Hypothesis," NBER Working Papers 12712, National Bureau of Economic Research, Inc.
  30. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
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