Vladimir Matveenko

Economic Growth and International Trade:

Role of Intermediate Goods

XIII Annual International Conference “Leontief Readings”,

St. Petersburg, 15 February 2014

Interdependence

Interpedendence

Leontief. Input-output production structure: intermediate goods are used to produce other intermediate goods.

Von Neumann – Gale model

Makarov and Rubinov (1973)

Rubinov, Borisov, Desnitskaya and Matveenko (1990)

Makarov, Levin and Rubinov (1995)

Interpedendence (continuation)

• Countries with relatively cheap labor (China, India, Eastern Europe) integrate into the World economy

• global production sharing• offshoring• fragmentation of production• global supply chains• comparative advantage at the component level• intrafirm trade

Interpedendence (continuation)

• Input-output ideology

Jones. Misallocation, economic growth, and input-output economics. NBER WP, 2011.

• Network economics

Acemoglu et al. The network origins of aggregate fluctuations. Econometrica, 2012.

“This paper argues that in the presence of intersector input-output linkages…”

• Network games with substitutability/submodularity or complementarity/supermodularuty

Interpedendence (continuation)

• Models of misallocation

Jones. American Economic Journal: Macroeconomics, 2011.

Banerjee and Moll, 2010

Fernald and Neiman, 2011

Epifani and Gancia, 2011

Restuccia and Rogerson 2012

• Intermediate goods in international trade

Yi. Can vertical specialization explain the growth of world trade? J. of Political Economy, 2003.

Eaton and Kortum. Technology, geography, and trade. Econometrica, 2002.

Alvarez and Lucas. General equilibrium analysis of the Eaton-Kortum model of international trade. J. of Monetary Economics, 2007.

Waugh. International trade and income differences. American Economic Review, 2007.

Ventura. Growth and interdependence. Quarterly Journal of Economics, 1997

• Countries: j = 1,…,J• Endowments: Labor, Initial capital• Production of intermediate goods i=1,2

1 unit of labor produces units of product 1

1 unit of capital produces 1 unit of product 2 • Production of final good (GDP)

• Utility and budget constraint:

jA

,)(1

21bb

jbj xx 1b

0

)( )(ln dttce jtn

jjjjjj wkrnkkc

Ventura. Growth and interdependence. Quarterly Journal of Economics, 1997

(continuation)

• “Conditional” factor price equalization corresponding to Trefler. International factor prices: Leontief was right! Journal of Political Economy, 1993

• If the average for the world per capita outputs of the intermediate products are A (product 1) and k (product 2) then

1pAw jj 2pr j

bAkpp 121 )/(/

Ventura. Growth and interdependence. Quarterly Journal of Economics, 1997

(continuation)

• World economy equilibrium dynamics

• Natural question: What is the dependence between degree of complementarity and the growth rate?

Ventura: Sustainable development for high

1b

11

)( bb

bbb kkA

с

с

cnkkAk bbb /1)(

Recent interest to important economic measures•Total factor productivity. •Elasticity of factor substitution – labor and capital. Pitchford, J.D., “Growth and the Elasticity of Substitution,” Economic Record 36 (1960), 491-503.•Direction of technological progress and relation to institutions. •Role of intermediate goods in formation of aggregate economic measures•Dependence of the aggregate TFP on the TFPs of sectors•Misallocation•Relation of the aggregate elasticity of substitution and the elasticities of substitution in sectors•Dependence of the growth rate of the economy on the TFPs and elasticiries of substitution in sectors and the structure of production in sectors

In complex economic systems•High interrelation of agents and complex interactions across them•Special role of externalities •Complementarity of activities•Intermediate products (among them ideas)

Complementarity of intermediate goods in production (possible model: Leontief function or a system of

Leontief functions).

Complementarity of ideas (different types of

knowledge)

•Complementarity Weak links Misallocation

3-sector model of general equilibrium with intermediate goods

Miyagiwa K. and Papageorgiou C. 2007. Endogenous aggregate elasticity of substitution.

Journal of Economic Dynamics and Control Xue J. and Yip C.K. 2013. Aggregate elasticity of

substitution and economic growth: A synthesis. Journal of Macroeconomics.

• Intermediate goods i=1,2 are produced by use of

capital and human capital

The intermediate goods are used too produce the final good:

2,1),,( iLKFAс iiii

),( 21 ccRY

3-sector model of general equilibrium with intermediate goods

(continuation)

• Distribution of capital and labor between sectors

• Consider the case when the aggregation function has the form

LLLKKK 2121 ,

/1

2211 tt XXBY

)1,0()0,(,0 B 01 02

3-sector model of general equilibrium with intermediate goods

(continuation)

• Two known specifications of the CES function

1)

2)• Question: How does the final product depend on

the elasticity of factor substitution? • Unexpected result: the absence of robustness on

functional form

121 1,0,0 2121

/1

2211 tt XXBY

Dependence of the total factor productivity (TFP) on the elasticity of factor substitution

4-sector model of general equilibrium with intermediate goods

We develop the approach of Jones, 2011. Intermediate goods and weak links in the theory of economic

development. American Economic Journal: Macroeconomics

• Basic goods i=1,2 are produced by use of capital,

human capital and intermediate goods

The basic goods are used in production of the final good and the aggregate of intermediate goods:

2,1),,,( iXHKFAQ iiiii

iii zcQ

),( 21 ccRY ),( 21 zzSX

Y.Martemyanov, V.Matveenko. 2014:

• Natural question: What is the dependence between degree of complementarity and the growth rate?

• In all three models we come to the absence of robustness to functional form.

0,0,0,)]([)1(

1

1

ijij

pn

j

pjijiji AptxAtx

Model of development with positive externalities

Matveenko. Journal of Policy Modeling 1995

• N economic agents

For martix any trajectory leads to a

cyclic growth

Для матрицы any trajectory leads to a stationary

state

x a x t i nti

ii ti

1 01 1( ) ( ) , , , ...; , ..., ;x a x tti

ij tj

1 01( ) ( ) , , , ...,

min,

01.11

101.1A

01.11

01.11A

tt Axx 1

)()(1 min j

tijj

it xax

Conclusion

• In the interdependent world a special role is played by the elasticity of substitution of intermediate goods and other parameters of the production function

• They depend on policies and institutions• A change in parameters easily leads to a change

in measures of development – in such way the last crisis can be explained

• Under big complementarities, a complex dynamics dominates

• A challenge for such models is accounting for differences in institutions, technologies and tastes

Thank you for your attention

vmatveenko@hse.ru