Title: How production networks amplify economic growth,
Abstract: Technological improvement is the most important cause of long-term economic
growth, but the factors that drive it are still not fully understood. In
standard growth models technology is treated in the aggregate, and a main goal
has been to understand how growth depends on factors such as knowledge
production. But an economy can also be viewed as a network, in which producers
purchase goods, convert them to new goods, and sell them to households or other
producers. Here we develop a simple theory that shows how the network
properties of an economy can amplify the effects of technological improvements
as they propagate along chains of production. A key property of an industry is
its output multiplier, which can be understood as the average number of
production steps required to make a good. The model predicts that the output
multiplier of an industry predicts future changes in prices, and that the
average output multiplier of a country predicts future economic growth. We test
these predictions using data from the World Input Output Database and find
results in good agreement with the model. The results show how purely
structural properties of an economy, that have nothing to do with innovation or
human creativity, can exert an important influence on long-term growth.