Date Added: Jan 2011
This paper develops an elementary theory of global supply chains. The authors consider a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods, and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Using this simple model, they offer a first look at how vertical specialization shapes the interdependence of nations.