An Elementary Theory of Global Supply Chains

TLDR

The article develops an elementary theory of global supply chains and uses it to examine how vertical specialization shapes national interdependence. The model assumes a world economy with many countries, a single factor, a continuum of intermediate goods, and a sequential final‑good production that can contain mistakes. In the unique free‑trade equilibrium, countries that are less prone to mistakes at all stages specialize in later production stages.

Abstract

This article develops an elementary theory of global supply chains. We consider a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Using this simple theoretical framework, we offer a first look at how vertical specialization shapes the interdependence of nations.