Abstract

This paper investigates the crucial role that the trade of intermediate goods plays in elucidating trade-output synchronization. We specifically highlight the significance of incorporating intermediate trade, particularly concerning the dominance of forward linkages in the global value chains (GVC) of countries producing intermediate goods. We extend Johnson's (2014) international real business cycle (IRBC) model to integrate the foreign value added by intermediate exporters within a forward-linkage GVC. Model simulations indicate that the trade of intermediate goods accounts for around 31 to 33% of observed trade-output synchronization. Notably, the inclusion of value-added rents in GVCs within intermediate goods trade boosts the explanatory power to 55%.