The Structure of Europe: International Input–Output Analysis with Trade in Intermediate Inputs and Capital Flows

• DOI: http://doi.org/10.1111/rode.12096
• Author: Mario Larch,Sebastian Benz,Markus Zimmer
• Published date: 01 August 2014
• Date: 01 August 2014

The Structure of Europe: International

Input–Output Analysis with Trade in Intermediate

Inputs and Capital Flows

Sebastian Benz, Mario Larch, and Markus Zimmer*

Abstract

In this paper we theoretically derive an international Rybczynski matrix. Its elements indicate the aggre-

gate output change in a country when endowment with one or more factors in the same or another

country is increased. This allows us to characterize the production structure in 11 countries of the Euro-

pean Union. Starting from a baseline case with free trade in final goods only, we analyze two types of

interaction between countries: international trade of intermediate inputs and internationally mobile

capital.

1. Introduction

Heckscher–Ohlin theory in its simplest specification (two countries, two goods, two

factors) implies that the pattern of production is determined by relative factor

endowments and relative factor input coefficients. Under reasonable assumptions, a

higher endowment of one factor in Country 1 drives up the output of the sector that

relies extensively on this factor, while output of the other sector declines. If prices

of final products remain constant and if the two countries are linked only via trade

in final goods, the situation in Country 1 will have no impact on Country 2’s output

pattern.

However, there are other ways that countries are connected, one of which is capital

mobility, especially in highly integrated regions such as the EU, where barriers to

capital mobility have been abolished. Moreover, production gets more and more

internationally fragmented.1Not only final goods but also intermediate inputs are

shipped internationally. Purely domestic flows of intermediate products are summa-

rized in a country’s input–output accounts, but there are no comparable data for

international flows of intermediates. Trefler and Zhu (2010) and Johnson and

Noguera (2012) make important contributions toward describing international input–

output relationships, but given this new paradigm in the academic treatment of inter-

national trade, it is important to expand research in this direction.

In a recent contribution, Fisher and Marshall (2011) show how to calculate

Rybczynski effects in a case where the number of sectors exceeds the number of

factors empirically observed in an economy. Assuming a Leontieff production tech-

* Larch: University of Bayreuth, Faculty of Law and Economics, 95440 Bayreuth, Germany. Tel: +49-921-

55-6241; Fax: +49-921-55-84-6241; E-mail: mario.larch@uni-bayreuth.de. Also affliated to Ifo Institute—

Leibniz Institute for Economic Research at the University of Munich, CESifo and GEP. Benz: Ifo

Institute—Leibniz Institute for Economic Research at the University of Munich, Poschingerstr. 5, 81679

München, Germany. Also affiliated to University of Tübingen. Zimmer: Ifo Institute—Leibniz Institute for

Economic Research at the University of Munich, Poschingerstr. 5, 81679 München, Germany. We grate-

fully acknowledge funding from the Bavarian Ministry of Economic Affairs, Infrastructure, Transport and

Technology under project “Innovationsspillovers in Deutschland”.

Review of Development Economics, 18(3), 461–474, 2014

DOI:10.1111/rode.12096

© 2014 John Wiley & Sons Ltd