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The World Income Distribution: The Effects of International Unbundling of Production

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  • Basco, Sergi
  • Mestieri, Marti

Abstract

We build a dynamic trade model to study how international unbundling of production and the emergence of global supply chains affect the world income distribution. We consider a world where countries only differ in their productivity. The level of productivity determines the number of varieties a country produces. To manufacture each variety a bundle of intermediates, which require capital and labor in different proportions, needs to be assembled. We characterize two trade regimes: (i) trade only in varieties and (ii) trade in both varieties and intermediates (unbundling). We show that unbundling of production generates income divergence among ex-ante identical countries (symmetry breaking). With heterogeneous countries, it increases top-bottom inequality and it has non-monotonic effects on the world income distribution (it reduces relatively more the income share of middle-productivity countries). We also show that when the South joins the global supply chain, the income share of all northern and the most productive southern countries increase, at the expense of the least productive countries. In addition, we find that the effect of a labor-saving technology, computerization, depends on the trade regime. Without unbundling, computerization has no effect on the world income distribution. With unbundling, computerization raises world inequality. Finally, we show that technology diffusion leads to income convergence under both trade regimes. However, with unbundling of production more low-productivity countries benefit from technological catch-up.

Suggested Citation

  • Basco, Sergi & Mestieri, Marti, 2014. "The World Income Distribution: The Effects of International Unbundling of Production," TSE Working Papers 14-531, Toulouse School of Economics (TSE), revised Nov 2014.
  • Handle: RePEc:tse:wpaper:28615
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    3. Anda DAVID, 2019. "Reducing Inequalities. Policy Proposals for the Development Cooperation Agenda," Working Paper 73a7cfad-34cd-4de2-bb30-a, Agence française de développement.
    4. Anda DAVID, 2019. "Réduire les inégalités. Propositions d’agenda pour la coopération internationale," Working Paper 73a7cfad-34cd-4de2-bb30-a, Agence française de développement.
    5. Stewart Nixon, 2020. "Global Integration Is More Important than Ever to Contain the Economic and Health Fallout and Exit the COVID-19 Pandemic Crisis," World Bank Publications - Reports 34394, The World Bank Group.
    6. Nixon, Stewart, 2020. "Global Integration Is More Important than Ever to Contain the Economic and Health Fallout and Exit the COVID-19 Pandemic Crisis," Research and Policy Briefs 152015, The World Bank.
    7. Huria, Sugandha, 2020. "Gains from Free Trade Agreements: A Theoretical Analysis," MPRA Paper 109815, University Library of Munich, Germany.
    8. Jim H. Shen & Leilei Shen & Jun Zhang, 2018. "Endowment Structure, Industry dynamics and Vertical Production Structure in China-Theory and Evidence," Working Papers 215, Department of Economics, SOAS University of London, UK.
    9. Bolhuis, Marijn, 2019. "Catch-Up Growth and Inter-Industry Productivity Spillovers," MPRA Paper 94730, University Library of Munich, Germany.
    10. Gulzar Ali & Zhaohua Li, 2016. "Analyzing the role of Imports in Economic Growth of Pakistan; Evidence from ARDL Bound Testing Approach," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(9), pages 19-37, September.

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    More about this item

    Keywords

    World Income Distribution; Symmetry Breaking; Global Supply Chains;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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