The Transmission Mechanism of Financial Shocks
Edited by Satoshi Inomata
Yoko Uchida and Satoshi Inomata 1. INTRODUCTION One of the key factors behind global trade growth in recent decades is the development of vertical production networks (Feenstra, 1998 and Krugman, 1995). Manufacturing goods are no longer produced in a single country. Production processes are subdivided into several stages, in which respective countries specialize according to their own comparative advantages. Many countries are involved in vertical production networks of producing just a single final good to consumers. In particular, as Pitigala (2009) points out, emerging economies considerably benefited from the development of vertical production networks since the network enabled them to install an appropriate portion of the production stages according to their levels of production technology. These countries enjoyed rapid trade growth through extensive participation in global production networks. This chapter examines how the global economic crisis has changed the nature of production networks in the Asia-Pacific region, and, in so doing, aims to envisage a possible direction for a sustainable production system in the post-crisis ‘Factory Asia’ (Baldwin, 2006). 2. VERTICAL SPECIALIZATION: CONCEPT AND CALCULATION METHOD Figure 4.1 illustrates an image of vertical production chains involving four countries. Intermediate goods, final goods and factor inputs are represented by circles, rectangles and triangles, respectively. Country 1 produces intermediate inputs that are exported. Country 2 combines imported intermediate inputs, domestic intermediate inputs, and capital/ labour to produce new products. Some portion of country 2’s output is consumed in the domestic market, while the rest is exported as intermediate or final goods to...
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