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Countries only differ on Hicks-neutral aggregate productivity. Our growth model is similar to Acemoglu and Ventura (2002), but we introduce intermediates heterogenous in capital intensity and allow for capital mobility. We theoretically analyse the long-run effect of unbundling of production on the world income distribution. Unbundling of production exacerbates world welfare inequality In sum, trade in intermediates (unbundling of production) has the potential to affect the redistribution of capital and labour between and within countries. labour), to the extent that capital and labour are complements in production. Changes in the global allocation of capital also affect returns to other domestic factors of production (e.g. In addition, capital mobility implies that trade in intermediates can affect the global allocation of capital. Moreover, since capital can be accumulated, trade in intermediates can have dynamic effects through altering countries’ savings rate. Factor proportion (Heckscher-Ohlin) trade models emphasise that trade in goods which are heterogenous in capital intensity creates winners and losers from globalisation because trade alters the relative return to factors of production. However, there has not been any theoretical analysis of the long-run effect of unbundling of production on inequality between and within countries.įigure 1 International unbundling of productionĪ distinctive feature of intermediate goods, which we document in a recent paper ( Basco and Mestieri 2019a), is that they are more heterogenous in capital intensity than final goods. Some authors have blamed globalisation for the increasing inequality and loss of jobs in developed countries (e.g. There has also been a sizable growth of both gross and net international capital flows (e.g. In contrast, after the 1990s, trade in intermediate goods, or ‘unbundling of production’, has become more prominent over time (see Figure 1) and global supply chains have emerged – a phenomenon termed ‘New Globalisation’ by Baldwin (2016). Before the 1990s, trade in final goods accounted for most of the value of world exports and international capital mobility was relatively low. Two remarkable facts of the globalisation process witnessed in the last 25 years are the large increases in both trade in intermediate goods and in capital mobility.