1. Vladimir Matveenko Economic Growth and International Trade: Role of Intermediate Goods XIII Annual International Conference “Leontief Readings”, St. Petersburg, 15 February 2014

2. Interdependence

3. 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)

4. 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

5. 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

6. 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.

7. 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:

8. 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

9. 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

10. 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

11. 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

14. 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:

15. 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

16. 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

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

18. 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:

19. 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.

20. 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

21. 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