Problem 2 OFFSHORING - FEENSTRA& HANSON IDEA (6 Points) Consider the following table that lists unit labor requirements

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Problem 2 Offshoring Feenstra Hanson Idea 6 Points Consider The Following Table That Lists Unit Labor Requirements 1 (152.85 KiB) Viewed 42 times

Problem 2 OFFSHORING - FEENSTRA& HANSON IDEA (6 Points) Consider the following table that lists unit labor requirements (hours of labor/unit or output) for four different tasks in U-land and M-land: Labor requirements per unit of output Management B Management A Assembly 2 Assembly 1 M-land 20 Low-skilled labor M-land 5 M-land 4 M-land 12 U-land 2 U-land 2 U-land 5 U-land 4 High-skilled labor M-land 10 M-land 20 M-land 4 M-land 3 U-land 4 U-land 10 U-land 1 U-land 1 Suppose that the wage of ● U-land low-skilled workers w = $10 per hour and that of • U-land high-skilled workers is w = $20 per hour, • M-land low-skilled workers is w = $1 per hour and that of • M-land high-skilled workers is w = $5 per hour. (a) Rank tasks acc. to skill-intensity. (b) ● Compute both countries' (marginal) cost of production for each production stage. ● Suppose, U-land faces trade cost of 50%. Which tasks will U-land offshore? (That is, which activities are cheaper to import from M-land and which are cheaper to produce domestically?) (c) Now consider relative skilled wages w/w: In which country is it higher? (d) Will this country's offshored production activities be high or low on the value chain ranked with respect to skill intensity and why? (Will this country offshore tasks that are high-skill or low-skill intensive?) (e) Suppose trade cost increase due to newly established trade embargo. How would this affect the 'slicing' of the value chain? (f) Draw (qualitative) relative labor supply and demand diagrams for both countries depicting the 'old' equilibrium and the 'new' one after trade embargo. What happens to relative skilled wages in both countries?