Consider an offshoring model in which Home country’s skill premium exceeds the F
ID: 1203118 • Letter: C
Question
Consider an offshoring model in which Home country’s skill premium exceeds the Foreign country’s skill premium. The other assumptions of the model are the same as in the one we discuss in class.
(1) Will the Home country offshore skilled-intensive activities or unskilled-intensive activities? Explain.
(2) Suppose that offshoring cost decreases. How does this affect the slicing of the value chain? Why?
(3) How does skill premium change after the reduction in offshoring cost in the Home country? Why?
(4) How does skill premium change after the reduction in offshoring cost in the Foreign country? Why?
Explanation / Answer
(1) Home firms send the most unskilled-labor intensive activities abroad and keep more skilled-labor intensive activities at home.
(2) Lower costs move activities in-between from Home to Foreign, and will be an increased demand for relative skilled labor in both countries.
(3) With greater outsourcing form Home to Foreign, the relative demand for skilled labor at Home increases and the relative wages rise. The relative demand for skilled labor in Foreign also increases.
(4) With lower trade costs, it is now desirable to shift more activities in the value-chain from Home to Foreign,
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