The paper examines the nature and growth of vertical specialization in world trade, where countries specialize in particular stages of a good's production sequence. Using input-output tables from OECD and emerging market countries, it estimates that vertical specialization accounts for up to 30% of world exports, with a 40% growth since 1970. The key insight is that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods cross borders, so even small reductions in these barriers can lead to significant vertical specialization, trade growth, and gains from trade. The paper extends the Dornbusch-Fischer-Samuelson Ricardian trade model to illustrate these points. Vertical specialization is defined as the use of imported inputs to produce a country's export goods. It involves at least two countries in the production sequence and requires that the good-in-process crosses multiple borders. The paper measures vertical specialization (VS) as the value of imported inputs embodied in exports. Data from OECD and other countries show that VS exports represent over 21% of total exports in 1990, with a 30% growth since 1970. VS growth accounts for up to one-third of overall export growth. The paper finds that smaller countries tend to be more vertically specialized than larger ones, and that the chemicals and machinery industries account for most of the growth in VS shares. Export-oriented sectors show the fastest growth in the use of imported inputs. While vertical specialization in the OECD primarily involves other OECD countries, the U.S. has shown a trend towards vertical specialization with developing countries. The growth in vertical specialization is attributed to reductions in trade barriers, which lower the cost of producing goods sequentially in multiple countries. The paper develops a simple extension of the Dornbusch-Fischer-Samuelson model to show how vertical specialization can lead to greater welfare gains from trade. The model shows that vertical specialization magnifies the effect of trade barrier reductions, allowing for large trade growth even if foreign and domestic goods are poor substitutes. The paper also provides decompositions of vertical specialization, showing that sectoral vertical intensity accounts for most of the growth in VS shares. The chemicals and machinery industries account for most of the VS share growth. The paper also examines the geographic orientation of vertical specialization, finding that it is more intensively involved in north-south trade, as with the Mexican maquiladoras. The paper concludes that vertical specialization is a key aspect of international trade, with significant implications for trade growth and welfare. The model shows that vertical specialization can lead to larger welfare gains from trade than traditional models of final goods trade. The paper provides estimates for vertical specialization in the world, showing that it accounts for up to 30% of world exports. The paper also provides estimates for VSK (imported capital inputs embodied in exports) and VS1 (exports embodied in a second country's exports), showing that together they account for 28%-30%The paper examines the nature and growth of vertical specialization in world trade, where countries specialize in particular stages of a good's production sequence. Using input-output tables from OECD and emerging market countries, it estimates that vertical specialization accounts for up to 30% of world exports, with a 40% growth since 1970. The key insight is that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods cross borders, so even small reductions in these barriers can lead to significant vertical specialization, trade growth, and gains from trade. The paper extends the Dornbusch-Fischer-Samuelson Ricardian trade model to illustrate these points. Vertical specialization is defined as the use of imported inputs to produce a country's export goods. It involves at least two countries in the production sequence and requires that the good-in-process crosses multiple borders. The paper measures vertical specialization (VS) as the value of imported inputs embodied in exports. Data from OECD and other countries show that VS exports represent over 21% of total exports in 1990, with a 30% growth since 1970. VS growth accounts for up to one-third of overall export growth. The paper finds that smaller countries tend to be more vertically specialized than larger ones, and that the chemicals and machinery industries account for most of the growth in VS shares. Export-oriented sectors show the fastest growth in the use of imported inputs. While vertical specialization in the OECD primarily involves other OECD countries, the U.S. has shown a trend towards vertical specialization with developing countries. The growth in vertical specialization is attributed to reductions in trade barriers, which lower the cost of producing goods sequentially in multiple countries. The paper develops a simple extension of the Dornbusch-Fischer-Samuelson model to show how vertical specialization can lead to greater welfare gains from trade. The model shows that vertical specialization magnifies the effect of trade barrier reductions, allowing for large trade growth even if foreign and domestic goods are poor substitutes. The paper also provides decompositions of vertical specialization, showing that sectoral vertical intensity accounts for most of the growth in VS shares. The chemicals and machinery industries account for most of the VS share growth. The paper also examines the geographic orientation of vertical specialization, finding that it is more intensively involved in north-south trade, as with the Mexican maquiladoras. The paper concludes that vertical specialization is a key aspect of international trade, with significant implications for trade growth and welfare. The model shows that vertical specialization can lead to larger welfare gains from trade than traditional models of final goods trade. The paper provides estimates for vertical specialization in the world, showing that it accounts for up to 30% of world exports. The paper also provides estimates for VSK (imported capital inputs embodied in exports) and VS1 (exports embodied in a second country's exports), showing that together they account for 28%-30%