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

Basco, Sergi and Mestieri, Marti (2014) The World Income Distribution: The Effects of International Unbundling of Production. TSE Working Paper, n. 14-531, Toulouse

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Official URL: http://tse-fr.eu/pub/28615

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.

Item Type: Monograph (Working Paper)
Language: English
Date: October 2014
Place of Publication: Toulouse
Uncontrolled Keywords: World Income Distribution, Symmetry Breaking, Global Supply Chains
JEL codes: F12 - Models of Trade with Imperfect Competition and Scale Economies
F43 - Economic Growth of Open Economies
O11 - Macroeconomic Analyses of Economic Development
O19 - International Linkages to Development; Role of International Organizations
O40 - General
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 16 Mar 2015 14:51
Last Modified: 21 Mar 2018 12:54
OAI ID: oai:tse-fr.eu:28615
URI: http://publications.ut-capitole.fr/id/eprint/16604

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