A Theory of Trade in a Global Production Network

55 Pages Posted: 2 Jun 2014

See all articles by Erik Maarten Bosker

Erik Maarten Bosker

University of Groningen; Erasmus University Rotterdam (EUR) - Department of Economics

Bastian Westbrock

Utrecht University School of Economics

Date Written: March 2014

Abstract

This paper develops a novel theory of trade in a global supply chain. We expand on a monopolistic competition trade model. Countries produce both intermediate and final goods that are sold domestically or, incurring country-pair specific trade costs, internationally. This links countries in a multi-stage production network. In the unique general equilibrium of the model, goods prices and wages in each country depend on the entire structure of trade connections. Drawing on methods from the social network literature, we then determine each country's importance in the global production network and analyse the welfare consequences of a further integration of the network. Our findings highlight the role of a few key countries that bring other nations closer together by intermediating their value added. Proximity to these key countries is crucial for other nations' income growth. An accompanying empirical analysis shows strong support in favor of the predicted network effects.

Keywords: global supply chains, international trade, network effects

JEL Classification: C67, F12, F63

Suggested Citation

Bosker, Erik Maarten and Westbrock, Bastian, A Theory of Trade in a Global Production Network (March 2014). CEPR Discussion Paper No. DP9870, Available at SSRN: https://ssrn.com/abstract=2444891

Erik Maarten Bosker (Contact Author)

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Bastian Westbrock

Utrecht University School of Economics ( email )

Adam Smith Building
Kriekenpitplein 21-22
Utrecht, 3584 EC
Netherlands

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