So where does the value of an iPod come from? Hal Varian tries to figure it out.

Here�s a hint: It is not Apple. The company outsources the entire manufacture of the device to a number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn.

But this list of companies isn�t a satisfactory answer either: They only do final assembly. What about the 451 parts that go into the iPod? Where are they made and by whom?

It turns out that for $110 of the $299 price, we don't know where those factor payments -- largely labor -- go.

The globalization of production creates real problems for statisticians. For example, Varian notes, "[e]ven though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese," because final assembly is done in China. Yet China's value added to the process -- the $150 minus the value of all the inputs used to make the iPod -- is only $4.

As to Apple,

The real value of the iPod doesn�t lie in its parts or even in putting those parts together. The bulk of the iPod�s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.

Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that�s what really matters.

Apple gets $80 for the idea of the iPod. It's safe to say as well that nobody at Apple actually knows how to build an iPod from scratch. But that's true for pencils too.

Labels: economics