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Journal of Economic Growth

, Volume 24, Issue 2, pp 189–221 | Cite as

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

  • Sergi Basco
  • Martí MestieriEmail author
Article

Abstract

Trade in intermediates, also known as unbundling of production, and trade in capital have become increasingly important in the world economy during the last 25 years. To jointly study these two phenomena, we develop a dynamic, factor-proportions model with trade in final goods, intermediates and capital where countries differ in their aggregate productivity levels (TFP). Our central result is to identify a novel channel whereby trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. With unbundling, high-productivity countries sort into the production of capital-intensive intermediates. They increase their capital stock (via capital imports and accumulation), and, ultimately, their real wages. This exacerbates initial productivity differences across countries and increases world income inequality. We also show that income inequality rises with unbundling (i) even in the case of ex-ante identical countries (symmetry breaking), (ii) when emerging countries start participating in trade in intermediates and (iii) when a labor-saving technology (computerization) is introduced. For an empirically-motivated model parametrization, middle-income countries experience the largest output decline with unbundling.

Keywords

Trade in intermediates Unbundling International capital flows World income distribution Symmetry breaking 

JEL Classification

F12 F43 O11 O19 O40 

Notes

Supplementary material

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Universitat Autònoma de Barcelona and MOVEBarcelonaSpain
  2. 2.Northwestern University and CEPREvanstonUSA

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