Global Value Chains: Unveiling the Nexus of Productivity and Welfare

The influence of domestic total factor productivity (TFP) growth on national welfare has been well-documented. Yet, the implications of global TFP growth on welfare through the lens of global value chains (GVCs) remains poorly understood. To bridge this gap, we developed a simple yet potent model to explore the TFP-welfare nexus based on growth accounting framework, streamlining the assumptions and parameters needed, facilitating the full integration of production networks. We measure the discrepancy between GDP growth and welfare growth of a nation, and further elucidate how this disparity, namely the terms of trade (TOT) effect, is influenced by global TFP growth. Integrating the concept of GVC TFP into the growth accounting framework enables us to break down the TOT effect into three primary components: global TFP growth, global wage growth, and global capital price growth; to further pinpoint the specific country origins of the three TOT effect components; and to differentiate between the direct and indirect TOT effects. Through the application of our model to the World Input-Output Database, we have gained novel insights into the complex interplay between global productivity and national welfare growth as well as trade policies.