Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development

48 Pages Posted: 10 Mar 2008 Last revised: 28 Mar 2008

See all articles by Charles I. Jones

Charles I. Jones

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2008

Abstract

Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to several old ideas in development economics and proposes that linkages, complementarity, and superstar effects are at the heart of the explanation. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods' share of revenue is about 1/2, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. Finally, the high elasticity of substitution associated with final consumption delivers a superstar effect: GDP depends disproportionately on the highest levels of productivity in the economy. This paper builds a model with links across sectors, complementary inputs, and highly substitutable consumption, and shows that it can easily generate 50-fold aggregate income differences.

Suggested Citation

Jones, Charles I., Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development (March 2008). NBER Working Paper No. w13834. Available at SSRN: https://ssrn.com/abstract=1104171

Charles I. Jones (Contact Author)

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