Consider an offshoring model such as the one illustrated in Figure 7‑1 in the text. In this model, the relative wage of low‑skilled labor to high‑skilled labor is lower in Foreign than in Home. The costs of capital and trade are uniform across production activities. a. Suppose that Home uniformly increases the tariff it applies to imports of all goods and services from Foreign. How does this affect the slicing of the value chain? The increased tariff___. b. On the labor supply and demand diagrams for Home and Foreign, show the effects of the change described in part a. Shift the curves affected and identify the new equilibriums with points B and B'. What happens to the relative wage in each country? c. Suppose instead that the Home country requires that low‑skilled labor in Foreign be paid a minimum wage that is higher than its current wage. This wage is still less than what low‑skilled labor earns at Home. How does this affect the slicing of the value chain? d. Continuing from part c, suppose that with the minimum wage that the relative wage of low‑skilled/high‑skilled labor in Foreign exceeds that in Home. Under these circumstances, what goods or tasks on the value chain will Home choose to offshore to foreign?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider an offshoring model such as the one illustrated in Figure 7‑1 in the text. In this model, the relative wage of low‑skilled labor to high‑skilled labor is lower in Foreign than in Home. The costs of capital and trade are uniform across production activities. a. Suppose that Home uniformly increases the tariff it applies to imports of all goods and services from Foreign. How does this affect the slicing of the value chain? The increased tariff___. b. On the labor supply and demand diagrams for Home and Foreign, show the effects of the change described in part a. Shift the curves affected and identify the new equilibriums with points B and B'. What happens to the relative wage in each country? c. Suppose instead that the Home country requires that low‑skilled labor in Foreign be paid a minimum wage that is higher than its current wage. This wage is still less than what low‑skilled labor earns at Home. How does this affect the slicing of the value chain? d. Continuing from part c, suppose that with the minimum wage that the relative wage of low‑skilled/high‑skilled labor in Foreign exceeds that in Home. Under these circumstances, what goods or tasks on the value chain will Home choose to offshore to foreign?

Home
Foreign
Home supply
Foreign supE
B
B'
A
A'
Home demand
Foreign dem
High-skilled / low-skilled labor
High-skilled / low-skilled labor
High-skilled / low-skilled wages

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