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Fragmentation in Simple Trade Models

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  • Deardorff, A.V.

Abstract

This paper examines the effects of "fragmentation," defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.

Suggested Citation

  • Deardorff, A.V., 1998. "Fragmentation in Simple Trade Models," Working Papers 422, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:422
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    References listed on IDEAS

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    1. Debaere, Peter & Demiroglu, Ufuk, 2003. "On the similarity of country endowments," Journal of International Economics, Elsevier, vol. 59(1), pages 101-136, January.
    2. Feenstra, Robert C & Hanson, Gordon H, 1996. "Globalization, Outsourcing, and Wage Inequality," American Economic Review, American Economic Association, vol. 86(2), pages 240-245, May.
    3. Courant, Paul N & Deardorff, Alan V, 1992. "International Trade with Lumpy Countries," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 198-210, February.
    4. Sven W. Arndt, 1998. "Super-Specialization And The Gains From Trade," Contemporary Economic Policy, Western Economic Association International, vol. 16(4), pages 480-485, October.
    5. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
    6. Deardorff, Alan V., 1994. "The possibility of factor price equalization, revisited," Journal of International Economics, Elsevier, vol. 36(1-2), pages 167-175, February.
    7. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
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    More about this item

    Keywords

    PRODUCTION ; INDUSTRIAL LOCATION ; TRADE;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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