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Traditional international real business cycle models produce a weak relationship between
trade and cross-country real GDP correlations, contradicting empirical findings. We reassess
this quantitative puzzle in a many-country model featuring (i) global value chains,
(ii) monopolistic competition, (iii) fluctuations in the number of varieties, and (iv) real
GDP measurement using double deflation. In this framework, fluctuations in imported inputs
cause profit and efficiency variations, reflected in measured GDP and productivity
fluctuations. Using actual variations in trade linkages, the model replicates 70% of the observed
bilateral trade linkages to real GDP correlation slope and 60% of the productivity
correlation slope.
