The most important industry in the world

I’ve been modelling the interconnected nature of the global economy by simulating a reduction in demand for various sectors in various countries. It’s a very simple little piece of analysis:

What would happen if the demand for a given sector in a given country was reduced by a single US dollar?

In answering this question for every sector in every country in the model, you can get a sense of which sectors have the biggest impact on the global economy. Basically you reduce the demand for each sector by a dollar and watch what happens to the rest of the world.

Unexpectedly, perhaps, this most-important sector is the vehicles sector in China. If demand for vehicles dropped by a single dollar, an unbelievable $98 would be lost in terms of global production. This is a truly astonishing conclusion.

So where does this $98 dollars come from? Well, the interconnectedness of the global economy is behind the magnitude of the number. In short, not only do sectors which feed the Chinese vehicle sector suffer, but all the sectors which feed those sectors and so on through the network that is the global economy. And a hint of how complex the picture is, is given by this image (click for full size):

Each circle is a sector in a certain country. The lines between the sectors represent changes in trade between them due to the $1 reduction in demand for Chinese vehicles. The sectors are sized according to how affected they are by the change. (Note for technical types only: they are sized proportional to their eigenvector centrality.)

It goes to show how interconnected the global economy really is. This small change in China has knock-on effects for the US, Japan, Korea, Germany, Italy, the Netherlands… the list goes on and on.

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Author: Rob Levy

Economist at NEF. Former teaching Fellow in Economics at UCL and Bristol University. Recently submitted my PhD. We'll see what happens...

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