How production networks amplify economic growth

TL;DR

This paper demonstrates how production networks significantly amplify the effects of technological improvements on economic growth and price reductions, with longer chains leading to faster GDP growth and price declines.

Contribution

It introduces a model showing how production networks propagate technological gains, highlighting the role of chain length in economic growth and price dynamics.

Findings

Longer production chains lead to faster price reductions.

Longer chains for an industry accelerate its price decline.

Longer chains for a country promote faster GDP growth.

Abstract

Technological improvement is the most important cause of long-term economic growth. We study the effects of technology improvement in the setting of a production network, in which each producer buys input goods and converts them to other goods, selling the product to households or other producers. We show how this network amplifies the effects of technological improvements as they propagate along chains of production. Longer production chains for an industry bias it towards faster price reduction, and longer production chains for a country bias it towards faster GDP growth. These predictions are in good agreement with data and improve with the passage of time, demonstrating a key influence of production chains in price change and output growth over the long term.