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The growth of world trade

  • Jun Ishii
  • Kei-Mu Yi

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.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9718.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9718
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  22. Marianne Baxter, 1991. "Fiscal policy, specialization, and trade in the two-sector model: the return of Ricardo?," Discussion Paper / Institute for Empirical Macroeconomics 56, Federal Reserve Bank of Minneapolis.
  23. Joseph E. Gagnon & Andrew K. Rose, 1990. "Why hasn't trade grown faster than income? Inter-industry trade over the past century," International Finance Discussion Papers 371, Board of Governors of the Federal Reserve System (U.S.).
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  25. Bruce A. Blonigen & Wesley W. Wilson, 1999. "Explaining Armington: What Determines Substitutability Between Home and Foreign Goods?," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 1-21, February.
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