About four-fifths of world trade is coordinated by multinational firms.
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The value added created within a country thus does not necessarily result in income.
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We develop a methodology to assess how much income is created by foreign consumption.
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Developed countries have higher trade surpluses when defined in terms of income.
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The US current account deficit almost disappears from the perspective of income.
Abstract
The existence of multinational firms and the rise of global value chains raise the question how international trade contributes to a country's income. Ownership relations between, for example, headquarters and subsidiaries result in international income transfers. These transfers are ignored in standard trade data. Taking them into account in a global input-output analysis allows us to assess how much income is generated in one country due to the consumption of final products in another country. This provides a new perspective compared to the concept of value-added exports introduced by Johnson and Noguera (2012). For the US, we find that the income generated by foreign consumption is 51% higher than the value added in the US that is generated by foreign consumption. Similar findings hold for other countries as well, but to a lesser extent. The implication is that the current account deficit of the US almost disappears from the income perspective.