DATA and CODES for: Distortions and the Structure of the World Economy

We model the world economy as one system of endogenous input-output relationships subject to frictions and study how the world’s input-output structure and world’s GDP change due to changes in frictions. We derive a sufficient statistic to identify frictions from the observed world input-output matrix, which we fully match for the year 2011. Our main empirical result is to determine how changes in internal frictions (affecting transactions across sectors within countries) impact the whole structure of the world’s economy and show that they have a much larger effect on world’s GDP than external frictions (affecting transactions across countries). We also use our approach to study the role of internal frictions during the Great Recession of 2007-2009. We document the change in internal trade across regions, and find for the case of the United States, that internal frictions explain 4.5 percent of the fall in external trade and 22.4 percent of the fall in internal trade during the Great Recession.