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An Elementary Theory of Global Supply Chains

  • Su Wang

    (MIT)

  • Jonathan Vogel

    (Columbia University)

  • Arnaud Costinot

    (MIT)

This paper develops an elementary theory of global supply chains. In spite of its simplicity, our theory is consistent with a number of stylized facts and able to deliver a rich set of predictions regarding how vertical specialization shapes the interdependence of nations. Among other things, our analysis predicts that poor countries have higher shares of primary production and assembly in value added, and provides a novel rationale for why rich countries both tend to trade relatively more with other rich countries and export and import goods with higher unit values. Our analysis also demonstrates that observing a country "moving up the chain"--an observation which is often taken as good news among policy makers--does not necessarily signal an improvement in its relative competitiveness and may very well be associated with a welfare loss. Our results point towards the importance of modeling the sequential nature of production for understanding the consequences of technological changes in developing and developed countries on their trading partners worldwide.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 95.

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Date of creation: 2011
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Handle: RePEc:red:sed011:95
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  13. Volker Nocke & Stephen Yeaple, 2004. "An Assignment Theory of Foreign Direct Investment," PIER Working Paper Archive 05-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  14. Ariel Burstein & Christopher Johann Kurz & Linda Tesar, 2004. "Trade, Production Sharing and the International Transmission of Business Cycles," Working Papers 522, Research Seminar in International Economics, University of Michigan.
  15. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "External Economies and International Trade Redux," NBER Working Papers 14425, National Bureau of Economic Research, Inc.
  16. Juan Carlos Hallak, 2010. "A Product-Quality View of the Linder Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 453-466, August.
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  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. Blanchard, Emily & Willmann, Gerald, 2013. "Trade, education, and the shrinking middle class," Kiel Working Papers 1831, Kiel Institute for the World Economy (IfW).
  30. 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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