For each activity, state which should be performed in the US and which in Mexico for each set of trade costs. Show you work by completing the table. The Labor hours are the number of hours required to complete each activity in Mexico and the US respectively. The wage rates are the hourly wage rates in each country. Use the excel template provided separately. Once you have completed the spreadsheet, determine where the value chain is divided at costs of 0%, 10%, 20% and 40%. Put the appropriate location in the Lowest Cost Production cell.

For each activity, state which should be performed in the US and which in Mexico for each set of trade costs. Show you work by completing the table. The Labor hours are the number of hours required to complete each activity in Mexico and the US respectively. The wage rates are the hourly wage rates in each country. Use the excel template provided separately. Once you have completed the spreadsheet, determine where the value chain is divided at costs of 0%, 10%, 20% and 40%. Put the appropriate location in the Lowest Cost Production cell.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Solve this macroeconomics

1. Consider an offshoring model of trade between the US and Mexico. There are four
activities. Any of these activities may be done in the US or Mexico. Using the table
below note the differences in labor productivity and wage rates in each category. Look
at the trade-off between keeping each activity in the US versus offshoring to Mexico
with additional trade costs of 0%, 10%, 20% and 40% for work done in Mexico to cover
transportation, tariffs and other requirements.
For each activity, state which should be performed in the US and which in Mexico for
each set of trade costs. Show you work by completing the table.
The Labor hours are the number of hours required to complete each activity in Mexico
and the US respectively. The wage rates are the hourly wage rates in each country.
Use the excel template provided separately.
Once you have completed the spreadsheet, determine where the value chain is divided
at costs of 0%, 10%, 20% and 40%. Put the appropriate location in the Lowest Cost
Production cell.

Trade
Cost
Question 1
Mexico
US
Imported by US,
0% Trade Costs
Lowest Cost
Location
Imported by US,
10% Trade Costs
Lowest Cost
Location
Imported by US,
20% Trade Costs
Lowest Cost
Location
Imported by US,
40% Trade Costs
Lowest Cost
Location
Labor hours:
Mexico Low-skill
Mexico High-skill
US Low-Skill
US High-Skill
Wage Rates:
Mexico Low-skill
Mexico High-skill
US Low-Skill
US High-Skill
$
ՄԴ ԱԴ ԱԴ ԱԴ
$
$
$
Assembly
20
4
5
1
1.75 $
6.00 $
12.00 $
24.00 $
Component
Production
443
14
1
Office Services
1.75 $
6.00 $
12.00 $
24.00 $
12
7
4
1
1.75 $
6.00 $
$
12.00
24.00 $
R&D
55
35
1
00
8
1.75
6.00
12.00
24.00

Branch of economics that analyzes the behavior and performance of an economy as a whole. It focuses on the study of aggregates and evaluates changes related to unemployment, gross domestic product, inflation, monetary and fiscal policies of the government.

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Step 1: Calculate the total cost of production for each activity in both Mexico and the US

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Step 2: Calculate the cost of production for each activity in Mexico with trade costs (0%, 10%, 20%, and

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Step 3: Compare the costs and determine the lowest cost location for each activity at each trade cost lev

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Step 4: Summary of the lowest cost location for each activity at each trade cost level:

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