The Impact of Trade in Services on Factor Incomes : Results from a Global Simulation Model

Abstract

Indian gross domestic product per capita increased rapidly between 2001 and 2006 in a climate of increasing services trade, with the export-oriented services sector responsible for rising shares of growth in gross domestic product. Due to its contribution to aggregate economic growth, there is a great need for empirical examination of the distributional consequences of this growth, especially in light of the challenges in obtaining theoretical solutions that can be generalized. This paper fills this gap in the literature by using a global simulation model to examine how sensitive factor incomes across different industries may have been to the historical changes in India's services exports and imports, and provides insight on the distribution of the national income growth attributable to the expansion of the services industry. Rent on capital in the service sector and wages of all workers would have increased as a result of greater services trade in this period, while income from capital specific to agriculture and manufacturing would have declined. The factors involved with the urban-based services sector may thus benefit from the services trade growth, while the total factor income involved in rural agriculture may decline.