Abstract: We construct a model incorporating processing and assembly, income transfer and income gap, then empirically analyze the impact of processing trade, induced labor mobility and income transfer on income disparity. The results show that processing trade causes a flow of rural surplus labor from the agricultural sector to the urban sector, and these migrant workers in turn transfer their salaries to their home countries, improving per capita income in rural area. However, when we counting per capita income by using household population, labor mobility induced by processing trade can not narrow our income gap between city and country. Assembly and processing may widen income disparity between urban and rural areas with the intergenerational replacement of migrant workers.

Key words: processing trade, income transfer, income disparity