international trade: offshoring

EC 370 Assignment 4

Offshoring

Due June 6, 2016

1. (65 points) Consider an offshoring model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production activities.

(a) (25 points) Will Home’s offshored prouction activities be high or low on the value chain for a given product? That is, will Home offshore production activities that are skilled labor intensive, or unskilled labor intensive? Explain.

(b) (15 points) Suppose that Home uniformly increases its tariff level, effectively increasing the cost of importing all goods and services from aboard. How does this affect the slicing of the value chain?

(c) (25 points) Draw relative labor supply and demand diagrams for Home and Foreign showing the effect of this change. What happens to the relative wage in each country?

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2. (35 points) Consider the numerical example we gave in class that help us to decide where to slice the value chain. Now consider a third scenario: Mexican wages: wS*=$5, wL*=$1. U.S. wages: wS=$25, wL=$5.

Mexican assembly: skilled=4, unskilled=20 U.S. assembly: skilled=1, unskilled=5 Mexican R&D: skilled=40, unskilled=4 U.S. R&D: skilled=10, unskilled=1

Trade costs = 50%.

(a) (20 points) Suppose you are the manager of a U.S. firm and you are trying to locate the two tasks you have at hand–assembly and R&D, to the country that produces it at a lower costs. Fill the blank cells in the following table with the costs of production. Hint: remember the (iceberg) trade costs.

Assembly R&D United States Mexico

(b) (15 points) Where would you put the tasks? Note that in this scenario, the third assumption about labor market is violated–now, Mexico and U.S. has the same skill-premium.

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