The retail value of the 30-gigabyte video iPod that the authors examined was $299. The most expensive component in it was the hard drive, which was manufactured by Toshiba and costs about $73. The next most costly components were the display module (about $20), the video/multimedia processor chip ($8) and the controller chip ($5). They estimated that the final assembly, done in China, cost only about $4 a unit.

One approach to tracing supply chain geography might be to attribute the cost of each component to the country of origin of its maker. So $73 of the cost of the iPod would be attributed to Japan since Toshiba is a Japanese company, and the $13 cost of the two chips would be attributed to the United States, since the suppliers, Broadcom and PortalPlayer, are American companies, and so on.

But this method hides some of the most important details. Toshiba may be a Japanese company, but it makes most of its hard drives in the Philippines and China. So perhaps we should also allocate part of the cost of that hard drive to one of those countries. The same problem arises regarding the Broadcom chips, with most of them manufactured in Taiwan. So how can one distribute the costs of the iPod components across the countries where they are manufactured in a meaningful way?

To answer this question, let us look at the production process as a sequence of steps, each possibly performed by a different company operating in a different country. At each step, inputs like computer chips and a bare circuit board are converted into outputs like an assembled circuit board. The difference between the cost of the inputs and the value of the outputs is the “value added” at that step, which can then be attributed to the country where that value was added.

The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value of the iPod. More specialized parts, like the hard drives and controller chips, have much higher value added.