Application of Average Propagation Length in Identifying Production Chains and its Relation to Value-added in Gross Exports and Vertical Specialization: Case Study of Iran

Three methods of average propagation length (APL). hypothetical extraction (HE) and vertical specialisation (VS) are used for measuring internal and external environment of production chains. The former is a combined method and has the ability to identify the internal production chains of upstream and downstream activities but cannot capture the external environment of production chains. To solve this issue, HE and VS methods in analysing external environment of production chains are proposed. The former calculates the external environment of domestic value added in gross exports (GE) whereas the latter measures external environment of an economy integration with the world economy. For this purpose the latest available survey-based input-output table of 2016 and converting, it into domestic table is used for measuring internal and external environments of production chains. The overall findings are as follows: first, from the internal environment side, agriculture and mining (including crude oil and natural gas) appear as upstream in the domestic production chains. Second, from external environment at the macrolevel, the results show that the share of DV in GE is 93% unit. Whereas the share of VS to GE is 7% unit. In addition to that, the mining activity with 43%-unit share of DVA to GE stands first whereas its share of VS to GE is 1% unit. The opposite trend is observed for industrial activities. These findings suggest that Iranian economy is still encompassed in the circle of the beginning part of production process with considerable high share of DVA in GE and very low share of VS.