World Economics Chapter 7: Outsourcing Analysis

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Questions and Answers

Which of the following describes outsourcing as presented in the chapter?

The importation of finished goods from international markets

The production of various parts of a good in different countries for final assembly elsewhere (correct)

The complete relocation of production activities to foreign countries

The production of intermediate goods overseas while assembling final products locally

How does outsourcing typically affect production costs according to the content?

Creates price stability by maintaining local production

Decreases production costs by importing cheaper intermediate goods (correct)

Increases production costs significantly

Has no notable effect on production costs

Which statement regarding the comparison between outsourcing and traditional trade theories is accurate?

Outsourcing is fundamentally opposed to any form of international trade

Outsourcing lowers prices and modifies employment composition, showing specificities beyond traditional models (correct)

Outsourcing eliminates the need for other trading practices like fair trade

Outsourcing strictly adheres to the Heckscher-Ohlin model of trade

What is a recent trend in outsourcing mentioned in the content?

Increased outsourcing of both goods and services across various sectors Signup and view all the answers

What happens to the relative demand for skilled labor in both Home and Foreign countries due to changes in labor dynamics?

It increases in both Home and Foreign. Signup and view all the answers

What leads to an increase in the relative wage of skilled labor at Home?

The jobs done at home becoming more skill intensive. Signup and view all the answers

What is a consequence of outsourcing activities to Foreign?

The relative demand for skilled labor increases in Foreign. Signup and view all the answers

Why does the relative wage of skilled labor increase in Foreign?

The relative demand for skilled labor rises. Signup and view all the answers

What effect does outsourcing have on the skill intensity of jobs in the Home country?

It increases the skill intensity of jobs. Signup and view all the answers

What relationship exists between trade costs and the demand for skilled labor?

Higher trade costs may increase the demand for skilled labor. Signup and view all the answers

Which of the following best describes the labor dynamics at Home after foreign outsourcing?

Skilled labor demand increases due to higher skill intensity. Signup and view all the answers

What has happened to the wages of skilled workers since the early 1980s?

They have risen relative to unskilled workers. Signup and view all the answers

What explains the simultaneous increase in wage and employment for skilled workers?

An outward shift of the relative demand curve. Signup and view all the answers

What role does outsourcing play according to the provided content?

Outsourcing can increase the relative demand for skilled labor. Signup and view all the answers

What is skill-biased technological change linked to?

Greater demand for skilled workers due to technology. Signup and view all the answers

What has been observed in the U.S. manufacturing sector during the period discussed?

Increased trade in intermediate inputs. Signup and view all the answers

What does the increase in relative employment level of skilled workers indicate?

An expansion in industries requiring skilled labor. Signup and view all the answers

Which factor is not identified as causing an increase in the relative demand for skilled labor?

A decrease in high school graduation rates. Signup and view all the answers

Why might the increase in skilled labor demand be misleading?

It might be an artifact of improved educational outcomes. Signup and view all the answers

What happens to the ratio of non-production skilled workers to production unskilled workers?

It increases due to higher demand for skilled labor. Signup and view all the answers

What trend was observed in relative wages and relative employment between 2006 and 2012?

Both relative wage and relative employment increased. Signup and view all the answers

What characterizes the job polarization phenomenon?

An increase in low-wage and high-wage job employment shares at the expense of middle-wage jobs. Signup and view all the answers

During which period did relative employment fall, as indicated by the orange dots?

2013–2014 Signup and view all the answers

Which of the following correctly describes the employment share changes from 1989 to 2007?

Both lower and higher wage occupations saw increased employment shares, while middle wage occupations decreased. Signup and view all the answers

What is the primary factor that contributed to employment growth in nonroutine jobs?

Decline in routine job opportunities Signup and view all the answers

Which occupational group shows less growth or decline in employment?

Routine cognitive jobs Signup and view all the answers

Which of the following statements about the employment share from 1979 to 2007 is accurate?

Both low-wage and high-wage occupations had increasing shares during the periods studied. Signup and view all the answers

What does the horizontal axis in the employment shares figure represent?

The wage percentile of U.S. occupations Signup and view all the answers

What was a significant pattern observed during 2000-2005 concerning relative wage and employment?

Relative wage sometimes fell while relative employment rose. Signup and view all the answers

Study Notes

World Economics - Chapter 7: Foreign Outsourcing of Goods and Services

The chapter aims to analyze outsourcing by comparing it to theories of trade in final goods. Analysis will predict wage variations, distribution between skilled and unskilled workers, and measure outsourcing gains. A more recent phenomenon, outsourcing of services, is also presented.
References are provided: Feenstra, Robert C., and Alan M. Taylor, International Trade, Economics, MacMillan, 2017, Fourth Edition.
The objective of the chapter is to analyze outsourcing by comparing it to theories of trade in final goods. Analysis will predict wages' variation and the distribution between skilled and unskilled workers. The analysis will also measure the gains from outsourcing. A more recent phenomenon, outsourcing of services, is also presented.
The chapter covers introduction, a model of outsourcing, the effect of outsourcing on relative wages, and outsourcing of services.

Outsourcing

Outsourcing is the production of parts of a good in different countries, then assembled into a finished product in another location.
Outsourcing includes services.
Outsourcing helps firms save costs by using foreign labor and components for lower production costs compared to local resources.
Outsourcing can be performed through contractual agreements (outsourcing) or internal subsidiaries (offshoring / vertical multinationals). Both methods have the same effects.

Outsourcing vs. Other Trade Models

Outsourcing shares some similarities with Ricardo and Heckscher-Ohlin models, but it also has unique characteristics.
Outsourcing lowers prices and alters employment compositions.
Outsourcing differs from models of immigration, as workers continue to live in their home countries when outsourcing labor.

Current Trade vs. Past Trade

The composition of global trade has shifted; agricultural products are less prevalent in imports/exports today compared to 1925 levels, with capital and consumer goods increasing.
Imports and exports of goods have risen significantly from 1925 to 1990.
These changes are because agricultural goods are not as profitable to outsource now.

Value Chain and Outsourcing

Each activity adds value to the final product. Certain activities can be moved to other countries that have cheaper production.
A model of outsourcing is presented (that differentiates activities by skill level (unskilled / skilled)).
Assumptions for the model include relative wage differences in skill levels and trade costs.
Outsourcing decisions will prioritize the unskilled labor-intensive components abroad, leaving the skilled labor-intensive activities in the home country.
If trade costs fall, a country is incentivized to outsource more activities. This leads to greater gains in output while using the same labor input as before.
The resulting effect will be an increase in the relative demand for skilled labor in the home country and in the foreign country where activities are outsourced, causing relative wage increases for skilled workers in both countries.
Differences in trade costs (when a free trade agreement occurs) can influence outsourcing strategies.

Consequences of Outsourcing

Outsourcing generally leads to increases in the skill level, ratio (S/L), and wage ratio (WS/WL) in both the home and foreign countries.

Outsourcing and Wages of Skilled Workers

Since the early 1980s, the wages of skilled workers in the U.S., U.K., and other industrialized countries have risen, alongside increasing employment in these sectors.

Outsourcing and Wages of Unskilled Workers

Outsourcing lowers relative wages of unskilled workers.

Recent Patterns of Outsourcing

Outsourcing patterns in the U.S. have been complicated since the 1990s, with shifts in employment in various skill levels.
Some periods demonstrated wage increases for non-production workers simultaneously with declines in employment of these workers, and periods of rising wages with increasing employment.

Services Outsourcing

A large trade surplus exists for the US for services, particularly in areas like computer and information services.
This trade surplus in services has risen since the 1970s.

Key Points

Outsourcing can shift relative demand and increase the wages of skilled labor. Skilled workers will see wage increases, while unskilled workers will have them fall.
Outsourcing reduces production costs. The resulting lowering of the price benefits consumers. Outsourcing is evaluated as being beneficial for consumers.

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Description

This quiz focuses on Chapter 7 of World Economics, which examines the foreign outsourcing of goods and services. It delves into the implications of outsourcing on wage variations among skilled and unskilled workers, alongside the analysis of gains from outsourcing compared to traditional trade theories. Additionally, it highlights the recent trends in service outsourcing.