Suppose two countries, Home and Foreign, produce a final good using five stages of production: research, manufacturing, assembly, marketing, and distribution. Each stage uses both efts and newts as inputs. The stages can be ranked from most eft-intensive to most newt-intensive as follows: marketing, research, assembly, distribution, and manufacturing.
Suppose wages for both efts and newts are higher at Home, but that the relative wage for efts is higher in Foreign:
(Wage efts / Wage newts)^foreign > (Wage efts / Wage newts)^Home
1. Why might relative wages for efts be higher in Foreign? Explain using relative supply and relative demand of efts to newts.
2. Suppose Home offshores three stages of production to Foreign. If trade costs are uniform across stages of production, which stages will be offshored? Explain. If trade costs rise, such that one less stage is offshored to Foreign, which stage will it be? Explain.
3. What is the effect of the reduction in offshoring on the relative demand for efts in the Home country? In Foreign? What is the effect on the relative wages of efts to newts in each county? Explain.
4. Does reduced offshoring increase inequality between efts and newts within the two countries, decrease inequality, or is more information required? Explain.