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Intermediate Goods and Weak Links in the Theory of Economic Development
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Intermediate Goods and Weak Links in the Theory of Economic Development
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Journal Article
Intermediate Goods and Weak Links in the Theory of Economic Development
2011
Overview
What explains the enormous differences in incomes across countries? This paper returns to two old ideas: linkages and complementarity. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital in a neoclassical growth model. Because the intermediate goods share of output is about one-half, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems along a production chain can sharply reduce output under complementarity. These forces considerably amplify distortions to the allocation of resources, bringing us closer to understanding large income differences across countries.
