Roundabout Production Research Articles

A second-best argument for low optimal tariffs on intermediate inputs

We derive a new formula for the optimal uniform tariff in a small-country, heterogeneous-firm model with roundabout production and a nontraded good. Tariffs are applied on imported intermediate inputs. First-best policy requires that markups on domestic intermediate inputs are offset by subsidies. In a second-best setting where such subsidies are not used, roundabout production and the monopoly distortion in the traded sector create strong incentives to lower the optimal tariff on imported inputs. In a quantitative version of our two-sector small open economy, we find that the optimal tariff is lowered under nearly all parameter values considered, and can be negative.

GVCs and trade elasticities with multistage production

We build a quantitative model of trade with multistage manufacturing value chains, which features many countries, iceberg trade costs, and technology differences across both goods and production stages. We estimate technology and trade costs via the simulated method of moments, matching bilateral shipments of final goods and inputs. Applying the model, we investigate how comparative advantage and trade costs shape the structure of global value chains and trade flows. As the level of trade costs falls, we show that the gravity elasticity of bilateral trade to trade costs increases, due to the endogenous reorganization of value chains and increased export platform production. Surprisingly, however, the resulting increase in world trade (as a share of GDP) is not magnified by multistage production, relative to a benchmark Ricardian model with roundabout production.

Trouble In Mind by Alice Childress, and: Wedding Band by Alice Childress (review)

Reviewed by: Trouble In Mind by Alice Childress, and: Wedding Band by Alice Childress Melissa Barton TROUBLE IN MIND. By Alice Childress. Directed by Charles Randolph-Wright. Roundabout Theatre Company, New York. December 11, 2021. WEDDING BAND. By Alice Childress. Directed by Awoye Timpo. Theatre for a New Audience, Brooklyn. May 14, 2022. If Alice Childress is having a moment, one can’t help but wonder what she herself would have to say about it. There’s no doubt that Childress deserves to be remembered, most of all as the author of plays and fiction freighted with irony and wit, shimmering with hope, shot through with ambivalence and ambiguity. She felt her career to have been thwarted by prejudice, and she certainly craved the Broadway marquee she never graced in her lifetime. Yet it’s difficult to know how she would greet her Broadway premiere in 2021, framed as a rescue from a half-century of obscurity. The 2021–2022 season in New York City saw, seemingly coincidentally, two major revivals of Childress’s plays, each marketed as the resurrection of a lost genius. Both productions were couched in larger, overarching efforts by their sponsoring organizations to bring more Black plays to prominent stages—Roundabout’s “Refocus Project” collaboration with Black Theatre United, and Awoye Timpo’s organization CLASSIX. Both productions could be seen as responding, as well, to “We See [End Page 93] Click for larger view View full resolution LaChanze as Wiletta in Trouble in Mind. Photo by Joan Marcus. [End Page 94] You, White American Theater,” a manifesto issued in 2020 by a broad coalition of theatre makers calling for greater diversity both backstage and onstage. To be fair, director Randolph-Wright, a Roundabout board member, had long wanted to stage Trouble in Mind; he directed a workshop reading 15 years ago, and Timpo similarly has had a longstanding interest in Childress. But when organizations committed to the classics resurrect old plays that are suddenly considered of the moment, it invites the question: are Childress’s plays newly timely, or are they newly timeless? Childress herself has a lot to teach us about the difference. The plays certainly have a timely topicality, reminding us that white supremacy remains very much with us. And yet what is perhaps the most time-worn about the selection of these plays is their use as diversity programming: as Childress told James V. Hatch in 1972, the Greenwich Mews Theater produced Trouble in Mind in 1955 because “people were demanding that they do something Black.” The producers pressured Childress to make the play’s ambivalent resolution more cheerful and hopeful, and Childress capitulated, though she soon regretted it. Two years slogging through rewrites caused her to abandon a Broadway transfer, even though it would have made her the first Black woman playwright to be produced on the Great White Way—four years ahead of Lorraine Hansberry. Life very closely imitated art, since Trouble in Mind is a backstage “comedy-drama,” depicting a similar argument in rehearsals for Chaos in Belleville, a fictionalized, putatively anti-racist play. The director “Al Manners,” a pious mid-century liberal partly modeled on Elia Kazan and other Actors Studio contemporaries, and played in the Roundabout production by a wonderfully unctuous Michael Zegen, tells his cast, “We’re making one, beautiful, clear, point…violence is wrong […] It does not matter to me that they’re Negroes. Black, white, green, or purple, I maintain there is only one race…the human race.” The statement rings like the cocking of Chekhov’s gun. Before the play’s end, Manners has been exposed as a racist, and the star, Wiletta, has refused to perform, causing the production to crumble. Trouble in Mind is a tonal masterpiece, and director Randolph-Wright and the nine-member cast nimbly handled the play’s comedic opening beats of interwoven banter. Chaos in Belleville, the play being produced within Trouble in Mind, is an anti-lynching melodrama in the vein of white southerner Paul Green’s work from the 1920s. Both 1955 and 2021 audiences winkingly recognized the play as “problematic.” Trouble in Mind is not an anti-lynching play per se, even though it includes...

Accounting for inflation dynamic in a fully optimizing macroeconomic framework: evidence from the US states

ABSTRACT This article proposes a New Keynesian DSGE model that can capture the hump-shaped response of inflation to a monetary policy shock that does not depend upon backward-looking elements for the price and wage-setting, such as the indexation of wages or prices. The two additional elements required to achieve a hump-shaped response are roundabout production structure (input–output structure for production) and working capital. Depending on the model’s parameterization, this channel can provide a pronounced response of inflation. In addition, our article provides some reduced-form evidence about the hump-shaped response of inflation using a VAR with Cholesky ordering.

Currency undervaluation and comparative advantage

This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country's comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: an elasticity effect versus an agglomeration effect working through firm entry and roundabout production.

Environmental Regulation, Roundabout Production, and Industrial Structure Transformation and Upgrading: Evidence from China

By dividing the production process into technical processes and procedural processes, this paper supplements the theoretical connotation of production roundaboutness, and analyzes and discusses the micro impact mechanisms of environmental regulation on industrial structure through production roundaboutness. Subsequently, based on the panel data of 31 provinces and cities in China from 2003 to 2017, a panel threshold model was adopted to empirically analyze the impact of environmental regulation, the synergy of environmental regulation, and roundabout production on the transformation and upgrading of industrial structures. The result shows there is a single threshold effect of environmental regulation on the upgrading and transformation of industrial structures based on the threshold variable of production roundaboutness. As well as the continuous increase in production roundaboutness, significant positive correlations between environmental regulation and the transformation and upgrading of industrial structures gradually vanish. However, the synergistic growth of environmental regulation and production roundaboutness is significantly and negatively correlated with industrial structure transformation and upgrade. Investment in social fixed assets has a positive incentive effect on industrial structure transformation and upgrade, while government expenditure, foreign trade, and opening-up have different degrees of inhibition on it. In order to speed up the transformation and upgrading of industrial structures under environmental and resource constraints, it is necessary to straighten out the relationship between environmental regulation and roundabout production, and to promote the scientific development of both.

Classification and Roundabout Production in High‐value Agriculture: A Fresh Approach to Industrialization

ABSTRACTDeveloping countries are balance‐of‐payments constrained. In this context, high‐value agricultural exports can make a greater contribution to structural change than development economists and developing country governments have typically acknowledged. This is thanks to dramatic recent changes in agricultural production, consumption and trade. These transformations are obscured by a simple classification system that has not adapted to changing patterns of global capitalist production. This article examines some recent efforts to rethink the basis of economic classification; it contributes to this emerging literature by proposing a way to think about the distinctions among economic activities that builds directly from the observation of production rather than a method of ex‐post mapping of trade data. A more accurate classification of economic activities would, the authors suggest, help policy officials design more coherent and growth‐enhancing industrial policies in support of accelerated structural change and productivity growth. The article draws on primary fieldwork in Ethiopia in particular, but also on fieldwork in South Africa and on secondary evidence.

A Second-Best Argument for Low Optimal Tariffs

We derive a new formula for the optimal uniform tariff in a small-country, heterogeneous-firm model with roundabout production and a nontraded good. Tariffs are applied on imported intermediate inputs. First-best policy requires that markups on domestic intermediate inputs are offset by subsidies. In a second-best setting where such subsidies are not used, the double- marginalization of domestic markups creates a strong incentive to lower the optimal tariff on imported inputs. In a 186-country quantitative model, the median optimal tariff is 10%, and negative for five countries, as compared to 27% in manufacturing from the one-sector, optimal tariff formula without roundabout production.

On the welfare and cyclical implications of moderate trend inflation

The welfare and cyclical implications of moderate trend inflation are addressed in an augmented medium-scale DSGE model. Increasing trend inflation from 2 to 4 percent generates a consumption-equivalent welfare loss of about 4 percent. Welfare costs of this magnitude are driven by: staggered wage contracts, trend growth, extended borrowing, a roundabout production structure, and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI). A sticky-price model abstracting from these features generates much smaller losses. Moderate trend inflation also has important business-cycle implications, interacting much more strongly with MEI shocks than with productivity or monetary shocks.

Trade and Domestic Production Networks

We use Belgian data with information on domestic firm-to-firm sales and foreign trade transactions to study how international trade affects firms' unit cost and the consumer's real wage. We show theoretically that the gains from trade depend on domestic firm-to-firm linkages. Furthermore, we develop a tractable model of endogenous network formation, allowing firm-to-firm connections to form or break in response to import price changes. Quantitatively, we find that for small import price changes, alternative models that assume a roundabout production structure, despite falsely implying that all firms are connected within one link, yield similar predictions for the change in the real wage to the model that fits the actual linkages between firms. For large changes in the price of foreign goods, both the existing network structure and the endogeneity of the connections between firms are found to be quantitatively important.

A reevaluation of the macroeconomic effects of positive trend inflation

To date, most of the papers which have examined the effects of trend inflation on the properties of New Keynesian model were based on relatively simple sticky-prices DSGE models and whose realism was sometimes questionable. In this paper, we re-evaluate the macroeconomic effects of non-zero trend inflation. Building on the model of Ascari (2004) as one of the most-cited papers in the literature on the effects of trend inflation, we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date. We propose a refinement of this model by introducing two theoretical important ingredients, namely investment adjustment costs, and a roundabout production structure. Once we add these features to make the model more realistic, as commonly for medium-scale models, we find that the standard New Keynesian model without real frictions overestimates the short-term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term.

Symposium on The Price

Symposium on <i>The Price</i>

Sticky price models of the business cycle: Can the roundabout production solve the persistence puzzle?

This paper considers the persistence puzzle unveiled by Chari et al. (2000). Our findings show that endogenously persistent output dynamics are not a puzzle for the standard sticky-price model once roundabout production is taken into account. We make this point using a new-Keynesian framework emphasizing an inertial mechanism called the multiplier for price stickiness in the spirit of Basu (1995).

TRANSPORT ASPECT OF ROUNDABOUT PRODUCTION METHODS

[For the English abstract and full text of the article please see the attached PDF-File (English version follows Russian version)].ABSTRACT The essence of roundabout methods of production, according to the author, is that the ultimate goal of the process, which is to provide consumer goods, is achieved through creation and sales of intermediate products, which are capital. The use of such techniques improves efficiency of production, so the growth of «roundaboutness» is a dominant trend of economic development. The specifics of transport aspect in this case is the fact that transport connects various stages of production chain, located at different points in space, and thus has spatial roundaboutness effect, which is the most pronounced in today’s global economy. The effectiveness of development of global economic production chains increases with the absence of barriers to movement of goods, capital and labor and with availability of market pricing, not distorted by regulatory action. Keywords: transport, roundabout production, spatial roundabout effect, capital, global economy.

On the Generalization of the Concept of Böhm-Bawerkʼs Average Period of Production to the Autoregressive Pattern of Input―Output Structure:

Abstract: Kei Shibata （1902―1986）, a creative theoretical economist, was the first Japanese economist to gain international recognition. One of his most famous works is an attempt to synthesize Walrasian/Casselian General Equilibrium Theory with Marxian Economic Theory. Most of his economic theories were first published in Keizaironso and were later included in his first book, Rironkeizaigaku （meaning theoretical economics） published in 1935 and 1936. After completing this book, Shibata turned to investigating new economic principles be-yond capitalism. Shibataʼs investigation had some byproducts. The most remarkable was an attempt to generalize Böhm-Bawerkʼs concept of the average period of production （APP）, which is defined as the length of the roundabout production process, whereby capital goods are first produced and then employed in the production of the final consumer good. This con-cept was criticized because it can only be applied in the case of a single linear stage pattern of production, but not in the case of an autoregressive pattern of input―output structure. Later studies reveal that the concept is destined to fail because as the roundabout period of produc-tion reaches an infinite value, the APP also reaches an infinite value. However, Shibata presented a mathematical way of determining the APP using an autoregressive pattern of the input―output structure. In addition, he concluded that in such cases, the APP has a finite value. His investigation is connected to the concept of the so-called capital intensity in modern economics and the organic composition of capital in Marx-ian economics. Therefore, his findings require further research. Hence, the present study aims to re-examine Shibataʼs contribution to the generalization of Böhm-Bawerkʼs theory of the APP. JEL classification numbers: B 41, B 53, D 24.

A Benefit from the Division of Labor that Adam Smith Missed

This paper argues that there is an important benefit from the division of labor that Adam Smith failed to mention, that is, the division of labor shortens the time required for capital formation and makes continuous roundabout production possible. The paper presents a simple model to demonstrate this benefit, which is referred to as the “continuity-in-capital-formation” benefit of the division of labor.

Trade Adjustment and Productivity in Large Crises

We empirically characterize the mechanics of trade adjustment during the Argentine crisis. Though imports collapsed by 70 percent from 2000 to 2002, the entry and exit of firms or products at the country level played a small role. The within-firm churning of imported inputs, however, played a sizeable role. We build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and roundabout production. Import demand is non-homothetic and the implications of an import price shock depend on the full distribution of firm-level adjustments. An import price shock generates a significant decline in productivity. (JEL F14, F31, F43, L60, O14, O19)

Is Equilibrium Enough and Was Stigler Wrong? Value Theory in the Böhm-Bawerk/Fisher Controversies

The interest-rate controversies between Bohm-Bawerk and Fisher have attracted little attention and, in the opinion of most commentators, justifiably so. Bohm-Bawerk and Fisher argue over what appear to be two minor issues – Bohm-Bawerk's claims that his third cause of interest (productivity of roundabout production processes) is independent of his other two subjective causes of interest and that simultaneous equations models involve circular reasoning and fail to provide a explanation of interest. The issues not only appear unimportant, their resolution seems clear – Bohm-Bawerk was wrong in both cases. Subsequent commentators, including Stigler, have taken Fisher's side, arguing that Bohm-Bawerk “fails to understand some of the most essential elements of modern economic theory, the concepts of mutual determination and equilibrium (developed by the use of the theory of simultaneous equations). I propose a radically different assessment, arguing that post-1870 debates over the extension of the subjective marginal utility theory of value to production and distribution, coupled with classical elements in Bohm-Bawerk’s theories and his “outsider” status as an Austrian, fuelled the Bohm-Bawerk-Fisher controversies. Bohm-Bawerk was reacting to Fisher’s gross exaggeration of subjective (versus objective) elements in his interest theory and wanted a causal explanation of prices in addition to well-understood simultaneous determination. Value theory debates explain both Fisher’s exaggerations and Bohm-Bawerk’s refusal to be satisfied with equilibrium alone.

Trade Adjustment and Productivity in Large Crises

The authors empirically characterize the mechanics of trade adjustment during the Argentine crisis using detailed firm-level customs data covering the universe of import transactions made during 1996-2008. Their main findings are as follows: First, the extensive margin defined as the entry and exit of firms or of products (at the country level) plays a small role during the crisis. Second, the sub-extensive margin defined as the churning of inputs within firms plays a sizeable role in aggregate adjustment. This implies that the true increase in input costs exceeds that imputed from conventional price indices. Third, the relative importance of these margins and of overall trade adjustment varies with firm size. Motivated by these facts, we build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and round-about production to evaluate the channels through which a collapse in imports affects TFP (total factor productivity) in manufacturing. Measured aggregate productivity in the sector depends on within-firm adjustments to the varieties imported as well as the joint distribution of each firm's technology and the share of imports in its total spending on inputs. We simulate an imported input cost shock and show that these mechanisms can deliver quantitatively significant declines in manufacturing TFP.

Trade Adjustment and Productivity in Large Crises

The authors empirically characterize the mechanics of trade adjustment during the Argentine crisis using detailed firm-level customs data covering the universe of import transactions made during 1996-2008. Their main findings are as follows: First, the extensive margin defined as the entry and exit of firms or of products (at the country level) plays a small role during the crisis. Second, the sub-extensive margin defined as the churning of inputs within firms plays a sizable role in aggregate adjustment. This implies that the true increase in input costs exceeds that imputed from conventional price indices. Third, the relative importance of these margins and of overall trade adjustment varies with firm size. Motivated by these facts, we build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and round-about production to evaluate the channels through which a collapse in imports affects TFP (total factor productivity) in manufacturing. Measured aggregate productivity in the sector depends on within-firm adjustments to the varieties imported as well as the joint distribution of each firm's technology and the share of imports in its total spending on inputs. We simulate an imported input cost shock and show that these mechanisms can deliver quantitatively significant declines in manufacturing TFP.