Production Network and GDP Growth: A Decomposition Approach

Abstract

We propose a novel decomposition of the input-output linkage impact into linkage efficiency and linkage strength. We show that, for standard multisectoral models,  countries' GDP growth rates are related to the average total backward linkages in the economy, which we call linkage strength, and to the covariance between sectoral backward linkages and the sectoral shares in final demand, which we call linkage efficiency. Using the World Input-Output Database, we further demonstrate that what matters for GDP growth is the linkage efficiency.

Keywords: Economic growth, input-output linkages, economic structure