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American Economic Journal: Macroeconomics: Vol. 3 No. 2 (April 2011)

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Intermediate Goods and Weak Links in the Theory of Economic Development

Article Citation

Jones, Charles I. 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development." American Economic Journal: Macroeconomics, 3(2): 1-28.

DOI: 10.1257/mac.3.2.1

Abstract

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.(JEL: D57, E23, O1O, O47)

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Authors

Jones, Charles I. (Stanford U)

JEL Classifications

D57: General Equilibrium and Disequilibrium: Input-Output Tables and Analysis
E23: Macroeconomics: Production
O10: Economic Development: General
O47: Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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