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The growth of world trade

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  • Jun Ishii
  • Kei-Mu Yi

Abstract

The growth in the trade share of output is one of the most important features of the world economy since World War II. We show that an important propagation mechanism for this growth is vertical specialization. Simply put, vertical specialization occurs when imported inputs are used to produce goods that are then exported. We show that many of the standard trade models - the Ricardian model, the monopolistic competition model, and the international real business cycle models - cannot explain the growth in trade unless very high elasticities of demand and substitution are assumed. We then use case studies and other empirical evidence to demonstrate the quantitative significance of vertical specialization in trade. Finally, we develop a model of vertical specialization that can explain the growth in trade under reasonable elasticities, which suggests that vertical specialization has important implications for the gains from trade.

Suggested Citation

  • Jun Ishii & Kei-Mu Yi, 1997. "The growth of world trade," Research Paper 9718, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9718
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    References listed on IDEAS

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    Cited by:

    1. Ventura-Dias, Vivianne & Durán Lima, José Elías, 2001. "Production sharing in Latin American trade: a research note," Comercio Internacional 22, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Ward, William A. & Bhattarai, Madhusudan & Huang, Pei, 1999. "The New Economics Of Distance: Long-Term Trends In Indexes Of Spatial Friction," Working Papers 18808, Clemson University, Department of Agricultural and Applied Economics.
    3. Baldwin, Richard, 2010. "Unilateral tariff liberalisation," CEPR Discussion Papers 8162, C.E.P.R. Discussion Papers.
    4. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, vol. 97(2), pages 376-391.
    5. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February.
    6. Elvio Mattioli & Giuseppe Ricciardo Lamonica, 2015. "The Evolution Of The Vertical Specialization In The World Economy (1995 – 2011)," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 69(3), pages 5-26, July-Sept.
    7. Devereux, Michael B., 1999. "Growth and the dynamics of trade liberalization," Journal of Economic Dynamics and Control, Elsevier, vol. 23(5-6), pages 773-795, April.
    8. Edwards, T. Huw, 2010. "Globalisation as a 'good times' phenomenon: A search-based explanation," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-48.
    9. Feeney, JoAnne, 1999. "International risk sharing, learning by doing, and growth," Journal of Development Economics, Elsevier, vol. 58(2), pages 297-318, April.
    10. Witada Anukoonwattaka, 2011. "Driving forces of Asian international production networks: A brief history and theoretical perspectives," STUDIES IN TRADE AND INVESTMENT, in: Witada Anukoonwattaka & Mia Mikic (ed.), India: A New Player in Asian Production Networks?, Studies in Trade and Investment 75, chapter 1, pages 7-22, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    11. 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.

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