The world income distribution: the effects of international unbundling of production

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). Unbundling of production also increases within-country inequality in all 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.

Statistics to Measure Offshoring and its Impact

“…More generally, there is the question of whether the increases linkages between countries through global value chains can lead to the changes in global inequality that have occurred: falling inequality overall due to the growth of average income in China, but rising inequality within some countries (including China) . This topic is examined theoretically by Basco and Mestieri (2014) and by Matsuyama (2013). Both papers show that the unbundling of production can lead to income divergence between ex ante identical countries.…”

On the Geography of Global Value Chains

“…This will allow our model to encompass previous Ricardian models—and most notably Eaton and Kortum ()—featuring roundabout production. On the downside, this assumption precludes a study of the effects of GVC integration on wage inequality, as in the work of Basco and Mestieri () or Lee and Yi ().…”

Research on the Digitization of Manufacturing Will Enhance the Competitiveness of the Value Chain Based on Advantage Comparison

“…Effectively absorb advanced production technology and management concepts, thereby enterprises can reduce technology introduction costs, production costs, and learning costs [6]. Besides, under the stimulation of the learning-by-doing effect, enterprises promote the further improvement of production technology and management concepts through production, learning, and research; promote production efficiency; and promote industrial upgrading [7,8]. (2) e effect of GVC export competition.…”

“…In Table 4, column (6) and column (7) are the estimated results of formulas (18) and (19), respectively. We can find that the estimated coefficients of CHN_DIGI i,t and INT_DIGI i,t are all positive and pass the 1% significance test.…”

“…Replace the core explanatory variable global digital input (GLO_DIGI i,t ) with domestic digital input (CHN_DIGI i,t ) and international digital input (INT_DIGI i,t ). e estimation results are shown in column (6) and column (7) in Table 4. It can be seen that the estimated coefficients of CHN_DIGI i,t and INT_DIGI i,t are positive, and the significance is consistent with the coefficients using GLO_DIGI i,t , thus verifying the robustness of the conclusion.…”