Implications for Trade, Incomes and Economic Vulnerability
Edited by Benno Ferrarini and David Hummels
Chapter 8: Global supply chains and macroeconomic relationships in Asia
One of the key challenges to the analysis of open economy macroeconomic interactions involves the understanding of how flows in goods and services, capital and asset prices respond in a world where trade is not limited to final goods, but includes (potentially many) stages of intermediate production. That is particularly true in parts of the world deeply involved in trade in global supply chains – the phenomenon wherein a final good is produced in separate countries. Nowhere has this process of production fragmentation extended as far as in East Asia: hence, the need for an examination of the macroeconomic implications for the region. In this chapter, I survey the various channels by which economic interactions might evolve with increasing integration. First, I assess the implications for the measurement of macroeconomic variables; in particular the real exchange rate – the relative price of traded goods and services – will become more difficult to measure. One can no longer merely apply the final good prices to deflate the nominal exchange rate; rather one would need to keep track of the value added at each stage of production – and where it took place. Second, I assess the ramifications for the measurement of the relationship between exchange rates and trade flows, when relative prices and trade flows are properly measured. Third, the impact of greater vertical specialization on exchange rate pass-through into traded goods prices is examined. Fourth, I assess the evidence on business cycle synchronization.
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