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On some effects of international fragmentation of production on comparative advantages, trade flows, and the income of countries

  • Salvatore Baldone

    (Polytechnic University of Milano, Italy.)

  • Fabio Sdogati

    (Polytechnic University of Milano, Italy.)

  • Lucia Tajoli

    (Polytechnic University of Milano and Cespri Bocconi University, Milano, Italy.)

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, pre-trade conditions. But nowadays one 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 stageof-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.

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Paper provided by KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy in its series KITeS Working Papers with number 187.

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Length: pages 34
Date of creation: Nov 2006
Date of revision: Nov 2006
Handle: RePEc:cri:cespri:wp187
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