Aggregate Demand, Vertical Specialization and Growth Accounting

Recent statistical advances suggest new ways of looking at growth accounting when global value chains (GVCs) are taken into consideration. The relative contribution of consumption, investment and net exports to economic growth are resized according to their net domestic value-added, discounting direct and indirect imports. The method is applied to the G-20 countries. The demand dynamics is first analysed through a growth-accounting decomposition. The demand for intermediate imported inputs used to produce domestic goods and services has been increasing rapidly over the 1995–2011 period. While counter-cyclical policies used by national governments usually favor public consumption because of its higher GDP multiplier (due to lower direct import content), the additional demand eventually “filters-out” to other countries thanks to the indirect imports required for producing domestic goods and services. It remains therefore a good candidate for coordinated macro-policies, even when policy making remains driven by domestic considerations, following the saying “economics is global but policy making is local”.Looking at the long term determinants of the demand for imports, our results indicate that world trade-income elasticity may eventually decrease under the force of trade's own success while demand switches towards less-tradable services. Even if the world Trade-GDP ratio stabilizes, it will do so at higher levels, increasing global interdependence and the need for policy coordination in-line with what the G-20 implemented to ward-off the 2008–2009 depression