International Value-Added Linkages and Income Differences
2 PM, Seminar room (first floor), Department of Economics and Management
Speaker: Alejandro Cunat, University of Vienna
We present a tractable model which allows us to incorporate countries’ international value-added linkages into the standard development accounting framework.
Development accounting aims to assess how much of the variation in per-worker incomes across countries can be attributed to quantifiable characteristics.
Typical exercises in this literature, which assume that countries are closed, find that this number is one third – a disappointing result since it implies that income differences are mostly due to factors which are not directly observable. Using international input-output tables for 40 major economies in the period 1995-2011, we show that it is possible to explain more than half of the cross-country variation in incomes once countries’ international linkages are formally taken into account. A calibrated version of our model lets us explore the effect of a number of hypothetical changes in the international environment on the world income distribution.