Trade, Value Added, and Productivity Linkages: A Quantitative Analysis

Traditional international real business cycle (IRBC) models produce a weak relationship between trade and cross-country real GDP (RGDP) correlations (corrRGDP), contradicting empirical findings. We reassess this quantitative puzzle in a many-country model featuring (i) global value chains, (ii) monopolistic competition, (iii) fluctuations in the number of varieties, and (iv) RGDP measurement using double deflation. In this framework, fluctuations in imported inputs cause profit and efficiency variations, reflected in measured GDP and productivity fluctuations. Using actual variations in trade linkages, the model replicates 70 percent of observed bilateral trade linkages to corrRGDP slope and 60 percent of productivity correlation slope. (JEL E13, E23, E32, F12, F23, F44, L14)