Offshoring of Good and Services

 Offshoring of Good and Services

Question 1 (5 Points): This question is based on the Offshoring of Good and Services

Consider a simplified offshoring model with two countries Home and Foreign and two activities, Components and R&D. Components is low-skilled labor intensive-whereas R&D is high-skilled labor-intensive. The final good produced is Mphone. The costs of capital and trade are uniform across production activities. The wage structure in Home (H) and Foreign (F) for low-skilled labor (L) and high-skilled labor (H) is as follows:

Home: WHL = 30,000, WHH = 90,000 and Foreign: WFL = 1,000, WFH = 5,000

  1. Which country has the higher relative wage of low-skilled labor? (1 points)
  2. Suppose the two countries engage in trade. Which activity will Home offshore, and why?(2 points)
  3. By opening to trade, the Home finds that it can import the components more cheaply thanit could produce on its own (due to lower world-relative price of components). Draw a diagram to illustrate the gains to Home from offshoring. (2 points)

Question 2 (5 Points): This question is based on the Specific Factor (Short Run) Model

A. What do you know about NAFTA? (1 point)
B. Why did the free trade agreement between US and Mexico face some opposition. whereas this was not the case with the free trade agreement between Canada and US. Explain the reasons in the light of your understanding of the concepts of interindustry and intraindustry trade studied in chapter 6. (4 points)

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