This chapter analyses global value chains. First, we explain how globalisation leads to fragmentation of production and dispersion of activities. Global value chains consist of nodes, where each node represents the value added received from the previous node. Countries can now specialise in activities and functions – nodes of the global value chain – rather than in the whole production of certain goods. Second, we discuss how to measure global value chains, which is challenging. Recent efforts allow us to estimate so-called forward- and backward linkages. Third, we provide a framework to map the governance configuration of global value chains based on the complexity of the knowledge to be exchanged in a transaction, the ease of codifying information about the transaction, and the capability of the supplier with respect to the specificities of the transaction. Fourth, we describe some possible sources of inefficiencies in global value chains (taxation, rent-seeking, contracts and trade costs).

This chapter describes broad regional and temporal trends in the evolution of international trade and international factor flows between 1700 and 1870, including key differences in trade costs across space and time. We find trade links in western Europe and the European colonies of North America intensified at the same time these regions experienced the initial Industrial Revolution and the spread of industrialization, which led to sustained economic growth. At the same time, global differences in specialization and income emerged. To understand the contribution of global market forces as well as colonialism to these differences, the chapter lays out theoretical reasons for links between trade and economic growth and examines related historical arguments and evidence. We conclude that trade contributed to global divergence, but the magnitude and mechanisms through which trade affected global welfare lies not so much in the direct impact of trade and specialization as in multiplier effects emerging from the interactions of trade with other factors that affect economic development.