Suppose there are three stages of production in the value chain of a final consumption good: Research and Development, Production, and Marketing. These stages are produced using left-handed workers and right-handed workers. Each stage requires both types of worker, but in different intensities.
Suppose that these stages can be ranked in order from left-hand-intensive to right-hand-intensive as follows: Production, Marketing, Research, and Development. Suppose that two countries exist, Home and Foreign. Wages for both types of labor are higher in the Home country, as is the ratio of left-handed wages to right-handed wages. Stages can be offshored at a uniform cost.
A) Why might the ratio of left-handed to right-handed wages be higher in the Home county? Explain using relative supply and demand.
B) Describe the incentive for producers in the Home Country to offshore stages of production to the Foreign Country. If Home offshores two stages of production, which will they be?
C) Suppose trade costs fall, and Home stops offshoring one stage – that is, the country “onshores” the stage. Which will it be? Describe the effect on the relative demand for left-handed labor in each country as a result of this decrease in outsourcing. What does this imply for the relative wages of left-handed to right-handed premium in each country?
D) Does decreased offshoring as described in part c increase inequality between right and left-handed workers in each country, decrease inequality, or is more information required? Explain.