Fragmentation in Simple Trade Models

Alan Deardorff

Working Papers from Michigan - Center for Research on Economic & Social Theory

Abstract: This paper examines the effects of "fragmentation,"defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.

Keywords: INTERNATIONAL TRADE; ECONOMIC MODELS (search for similar items in EconPapers)
JEL-codes: F10 F11 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1998
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Citations: View citations in EconPapers (35)

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Related works:
Journal Article: Fragmentation in simple trade models (2001)
Working Paper: Fragmentation in Simple Trade Models (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:michet:98-11

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