Vertical specialization, global expansion of supply chain, and convergence

Abstract In this paper, we construct an elaborate general equilibrium model with a continuum of production fragments for an intermediate good, then incorporate it in a growth model to address the effects of global production fragmentation, vertical specialization, and trade on growth and inequality for a small developing country. Among other things, we show that a small developing economy grows faster than the rest of the world as a result of global fragmentation and trade in intermediates if it is skilled-labor scarce. We further address the effects of such a trade opening on wage inequality.