RDP 2014-07: International Trade Costs, Global Supply Chains and Value-added Trade in Australia Appendix C: Shift-Share Analysis

To examine the factors that might explain the changes over time in the domestic supply chain, we conduct a shift-share analysis. This analysis allows us to decompose the aggregate changes in the supply chain indices into changes in the relative sizes of sectors with differing supply chain characteristics (‘between effects’) and changes in the supply chain characteristics of individual sectors (‘within effects’).

Denote aggregate fragmentation and upstreamness for the economy as a whole by and respectively. The changes in aggregate fragmentation and upstreamness between times t − 1 and t, and , are approximated as the sum of ‘between’ and ‘within’ effects, i.e. and , where

In aggregate, the Australian economy has become slightly more vertically fragmented since the mid 1990s, with most of the increase in fragmentation due to changes within industries (Figure C1). However, there has been an offsetting ‘between effect’ over the most recent few years, as the level of economic activity has shifted towards the resource and service sectors that are typically less fragmented than other sectors.

Also, there has been an increase in upstreamness in the aggregate economy since the mid 1990s. This has been mainly driven by an increase in the relative size of the resource sector which, in turn, is due to the terms of trade boom (Figure C2). However, over the mid 2000s the resource sector also became more upstream itself, which is likely to be a response to the commodity price boom.