This paper develops a simple general equilibrium model of trade in a global value chain framework. There are two countries, Home and Foreign. Each country specializes in producing only one final good and the two final goods are mutually imperfectly substitutable. The production of each final good is fragmented and some part(s) of one final good could be possibly produced in the other country. This fragmentation could have significant effects on the global economy. The paper not only shows that different international activities could affect the welfare of consumers between different countries in various ways, but also has interesting implications on the relationship between the ratio of domestic value added in gross export and the technology difference, which may explain the styl...[ Read more ]

This paper develops a simple general equilibrium model of trade in a global value chain framework. There are two countries, Home and Foreign. Each country specializes in producing only one final good and the two final goods are mutually imperfectly substitutable. The production of each final good is fragmented and some part(s) of one final good could be possibly produced in the other country. This fragmentation could have significant effects on the global economy. The paper not only shows that different international activities could affect the welfare of consumers between different countries in various ways, but also has interesting implications on the relationship between the ratio of domestic value added in gross export and the technology difference, which may explain the stylized fact that the ratio of domestic value added in gross export has been declining over time in recent year for many countries.

Keywords: global value chain, technology, welfare, ratio, declining, trade.