Offshoring and slicing the value chain Consider the Feenstra Hanson Model of off

Question

Offshoring and slicing the value chain

Consider the Feenstra Hanson Model of offshoring. Assume that in Home high-skilled labor has a higher relative wage than in Foreign. Also assume that the costs of capital and trade costs are uniform across production activities.

a.Will Home’s off shored production activities be high or low on the value chain for a given product? That is, will Home offshore activities that are high-skilled labor-intensive or low-skilled-labor-intensive? Explain. (5 points)

b. Suppose that Home uniformly increases tariff rates, effectively increasing the cost of importing all goods and services from abroad. How does this affect the slicing of the value chain? ( 5 points)

c. 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? (5 points)

Explanation / Answer

A) The skilled labour intensive activities will get more expensive at home relative to foreign and the reason behind it will be the high relative wage of home skilled labor. in the same way the low relative wage of unskilled labor makes unskilled labor intensive activities less expensive at home relative to foreign.

B)If home uniformly increases tariff rate then the outsourced activities will be fewer.The slicing of the value chain reflects this increased cost as a rightward shift.Home expands the set of activities that it does at Home to include incrementally higher value activities, whereas the set of high value outsourced activities shrinks..

C) An expansion in the set of production activities done at Home (to include higher value ones) increases the average skill intensity of Home production. This increases the relative demand for skilled labor at Home. Similarly, because Foreign ceases to do its least skill-intensive activities, the average

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