Abstract
The expansion of global production networks has raised many important questions about the interdependence among countries and how future changes in the world economy are likely to affect the countries’ positioning in global value chains. We are approaching the structure and lengths of value chains from a completely different perspective than has been available so far. By assigning a random endogenous variable to a network linkage representing the number of intermediate sales/purchases before absorption (final use or value added), the discrete-time absorbing Markov chains proposed here shed new light on the world input/output networks. The variance of this variable can help assess the risk when shaping the chain length and optimize the level of production. Contrary to what might be expected simply on the basis of comparative advantage, the results reveal that both the input and output chains exhibit the same quasi-stationary product distribution. Put differently, the expected proportion of time spent in a state before absorption is invariant to changes of the network type. Finally, the several global metrics proposed here, including the probability distribution of global value added/final output, provide guidance for policy makers when estimating the resilience of world trading system and forecasting the macroeconomic developments.
Highlights
The ideas of networked economy, pervasive transmission channels, systemic risk and complexity have become increasingly important after the 2008 financial crisis, but nowadays they are major concern on the impact of global trade tensions
The network analysis and related metrics are extremely important in assessing the complexity of the whole structure of interactions in the world economy, whilst the current research is still in its infancy
Given the importance of the distinctive features of output supply chain and input demand chain, in this paper, using the most recent world input–output database, we propose and investigated some novel properties of two discrete-time absorbing Markov chains and set them against the prevailing approaches of output upstreamness and input downstreamness
Summary
The ideas of networked economy, pervasive transmission channels, systemic risk and complexity have become increasingly important after the 2008 financial crisis, but nowadays they are major concern on the impact of global trade tensions. International fragmentation of production has made a huge transformation in geography and dynamics of international trade Such fragmentation of production activities has given rise to the global value chains (GVCs) and greatly contributed to reinforce the structural interdependence worldwide. The global production networks are very complex, with flows of value-added representing a final outcome of the complex linkages that exist between firms in different industries and countries over time. The evaluation of these linkages calls for developing new tools that go well beyond the appraisal of bilateral gross trade flows. The network analysis and related metrics are extremely important in assessing the complexity of the whole structure of interactions (direct and indirect linkages) in the world economy, whilst the current research is still in its infancy
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