International Trade 3rd Edition Feenstra

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 TestBanks Chapter 07: Offshoring of Goods and Services

1 The provision of a service or input component part that

is assembled into a final good at another location is
known as:
barter.
component trade.
intermediate trade.
offshoring.

2 A major factor in the ability of firms to purchase

services or components from other nations is:
the wider use of English as an international
language.
lowered transportation and communications costs.
the agreement by the WTO to allow firms to trade in
intermediate goods.
better health and safety standards abroad.

3 What is the difference between final goods and

intermediate goods?
Final goods require further processing before
consumption.
Intermediate goods are sold directly to the
consumer.
Intermediate goods are inputs for other goods.
Final goods require further processing before
consumption, while intermediate goods are inputs for
other goods.

4 The main reason why firms consider offshoring is to:

decrease their labor costs.

decrease their transportation costs.
decrease their construction costs.
decrease their “trade costs.”

5 Which of the following is an example of offshoring?

Intel undertakes direct foreign investment in China

to produce computer chips.
Ford establishes a factory in Germany to produce
automobiles for the European market.
General Motors moves assembly operations for
Chevrolets to its plant in Mexico.
Nike contracts with an Indonesian factory to
produce tennis shoes for the U.S. market.
6 The term offshoring means:

purchasing component parts or services from

foreign entities.
operating offshore oil rigs that are in international
waters.
banking activities in Caribbean nations.
operating a plant or other production facility in
another nation.

7 “Offshoring” is different from “outsourcing” because:

the former is FDI that establishes a subsidiary in a

foreign country.
the latter is FDI that establishes a subsidiary in a
foreign country.
the former involves hiring firms to produce a
product without investing in the foreign country.
the latter is sanctioned by the government.

8 Intel produces microchips in China and Costa Rica,

using subsidiaries that it owns. Mattel, in contrast,
arranges for the production of the Barbie doll in several
different countries. Which of the following statements
about the two companies is CORRECT?
Intel is involved in offshoring, whereas Mattel is
involved in offshoring.
Intel and Mattel are both involved in outsourcing.
Intel and Mattel are both involved in offshoring.
Both companies use FDI.

9 To analyze offshoring by firms, economists line up

activities that a firm must undertake to produce a
product in the rank order of the ratio of:
low­cost to high­cost activities.
high­skill labor to low­skill labor required for the
activity.
variable cost to fixed cost.
manufacturing versus service activities.

10 Which of the following is the CORRECT ranking (first to

last) of the value chain by order of production?
component production, assembly, marketing and
sales, R&D
component production, marketing and sales,
assembly, R&D
R&D, component production, assembly, marketing
and sales
 R&D, marketing and sales, component production,
assembly

11 Which of the following is the CORRECT ranking of the

value chain by level of skill of the labor force (lowest to
highest skill levels)?
component production, assembly, marketing and
sales, R&D
assembly, component production, marketing and
sales, R&D
assembly, marketing and sales, component
production, R&D
component production, marketing and sales,
assembly, R&D

12 Which of the following activities in the value chain is

LEAST likely to be offshored?
assembly
component production
R&D
sales

13 Which of the following activities in the value chain is

MOST likely to be offshored?
R&D
sales
component production
assembly

14 Among the activities in the value chain, assembly

requires _________ labor and R&D requires
__________ labor.
skilled; unskilled
unskilled; skilled
skilled; skilled
unskilled; unskilled

15 To predict which activities a U.S. firm will find profitable

to offshored, we must assume that it can use relatively
lower­cost labor in a foreign nation. This is usually
_____ labor.
skilled
unskilled
economical
offshored

16 The lineup of value­added activities from lowest to

highest for a firm is often called:
the value­added formula.
 the effective operational accounting equation.
the value­added tax.
the value chain for the product.

17 Offshoring assumes that a firm will use relatively lower­

cost foreign labor. However, there are other
considerations involved, such as:
I. higher taxes and higher costs of construction,
electricity, and fuel.
II. higher capital costs.
III. higher transportation costs.
I
II
III
I, II, and III

18 Which of the following is a “trade cost” that firms need

to consider when making offshoring decisions?
higher prices of utilities (electricity, fuel) in other
countries
higher costs of construction of a plant in other
countries
higher costs associated with poor communication
and transportation
None of these is a “trade cost.”

19 The offshoring decision revolves around:

the level of domestic opposition to the idea of

offshoring.
the level of technology at home and abroad.
a comparison of the values added, the marginal
costs, and the trade costs of a firm's activities at home
versus abroad.
labor costs abroad versus in the home market.

20 “Slicing the value chain” refers to:

the practice of offshoring all activities with labor

union representation at home.
the transfer of activities that are more profitable
when carried out in foreign nations.
substituting capital for labor wherever possible.
the transfer of activities that are less profitable
when carried out in foreign nations.

21 What is the MOST important labor market situation at

home and abroad that affects a firm's decision to
 offshore?
the relative equilibrium wages of skilled versus
unskilled workers at home and abroad
the relative educational attainment of workers at
home and abroad
the absolute wages of workers at home and abroad
the ability of workers abroad to speak English

22 “Slicing up the value chain” refers to the:

division of production between offshored foreign

operations using unskilled labor and domestic
operations using skilled labor.
division of production between component
production and assembly operations.
division of labor between domestic unskilled and
skilled labor.
division of the marketing and sales and R&D
functions.

23 Reductions in trade costs will tend to:

discourage offshoring.
discourage foreign production.
encourage offshoring.
have no immediate effect on offshoring decisions.

24 When does it become more desirable to shift more

activities in the value chain abroad?
when the wage of unskilled workers increases
abroad
when trade costs decline
when the wage of skilled workers decreases at
home
when the price of the final output rises

25 Which of the following groups of Ford Motor Company

employees will be MOST adversely affected by Ford's
offshoring of part of its operations to Mexico?
Ford engineers and scientists
Ford accountants
Ford managers
Ford assembly line workers

26 When there is an increase in activities of firms

offshoring to foreign nations, we can expect the
demand for higher­skilled labor in the home market:
to decrease and its relative wage decrease.
to increase and its relative wage increase.
 to be unaffected.
to become more elastic, and the relative wage will
decrease.

27 As offshoring activities increase, the demand for

relatively skilled workers in the home nation:
will increase because the new demand is for
relatively higher­skilled workers than previously
offshored activities.
will decrease because the new demand is for lower­
skilled workers.
will neither increase nor decrease.
will raise wages to the point that offshoring no
longer becomes a possibility.

28 How will an increase in offshoring affect the demand for

skilled labor and wages of skilled labor in the home
country?
The demand for skilled labor will increase, but the
wages of skilled labor will decrease.
The demand for skilled labor and the wages of
skilled labor will both decrease.
The demand for skilled labor will decrease, but the
wages of skilled labor will increase.
The demand for skilled labor and the wages of
skilled labor will both increase.

29 What will happen to wages of skilled workers

domestically when offshoring occurs?
They will rise.
They will fall.
They will not change.
They will fall in the export sector.

30 An increase in demand for skilled, offshored labor will

raise the relative wage of skilled labor in both the home
and offshored nations because:
the home nation will shift resources from medium­
to higher­skilled domestic workers, and the offshored
nation will see a shift in in demand from lower­skilled
to medium­skilled workers.
the home nation will shift resources from medium­
to lower­skilled domestic workers, and the offshored
nation will see a shift in demand from medium­skilled
to lower­skilled workers.
activities that used higher­priced, medium­skilled
workers in the home nation now use lower­priced,
lower­skilled workers in the offshored nation.
the home nation will shift resources from skilled to
 medium­ skilled domestic workers, while activities that
used higher­priced, medium­skilled workers in the
offshored nation will now use lower­priced, medium­
skilled workers.

31 When work done by skilled workers is offshored, what

will happen to wages of skilled workers abroad when
offshoring occurs?
They will rise.
They will fall.
They will not change.
They will fall in the export sector.

32 The offshoring of unskilled work from home country to

a foreign country will cause:
an increase in the wages for unskilled workers in the
home country.
a decrease in the wages for skilled workers in the
home country.
an increase in the wages for skilled workers in the
home country.
a decrease in the wages for skilled workers in the
foreign country.

33 Offshoring moves:

activities with the greatest skill intensity.

activities with moderate skill intensity.
activities with low skill intensity.
all activities.

34 Which of the following BEST describes the pattern of

real U.S. production wages over the past 50 years?
continuous decline
constant over time
continuous rise
None of these describe the pattern.

35 A case study of wages in the United States from 1983

to 2006 shows:
a decrease in white­collar wages due to offshoring.
a relative increase in skilled worker wages
(nonproduction) compared with less­skilled wages
(production).
a decrease in employment of skilled workers.
a relative decrease in skilled worker wages
(nonproduction) compared with less­skilled wages
(production).
36 From 1982 to 2000, the relative wage of non­
production to production workers in U.S. manufacturing
and their share of total employment in U.S.
manufacturing increased. One logical explanation would
be:
that their wages fell in real terms.
that there was a decrease in demand for skilled
workers.
that due to productivity or demand for products,
there was a relative increase in demand for skilled
workers.
that minimum wage increases caused the demand
for workers to shift toward the skilled.

37 What happened to wages of U.S. nonproduction

workers relative to U.S. production workers from 1986
to 2000?
They rose.
They fell.
They did not change.
They fell in the export sector.

38 What accounts for increases in both the relative wage

and the relative employment of U.S. nonproduction
workers during the 1980s?
The relative demand for nonproduction workers fell.

The relative supply of nonproduction workers rose.

The relative demand for nonproduction workers
rose.
The relative supply of nonproduction workers fell.

39 What may have caused the relative demand for U.S.

nonproduction workers to increase during the 1980s?
declines in the rate of U.S. technological change
skilled­biased technological change
increased production of import­competing goods
declines in the rate of U.S. technological change and
skilled­biased technological change

40 Wage changes among skilled and unskilled workers in

Mexico due to offshoring are different, depending on
whether it is the ________ or _________.
maquiladora sector; nonmaquiladora sector
younger workers; older workers
male workers; female workers
nonunion workforces; unionized workforces

41 After NAFTA went into effect, what was expected to

 happen to wages of unskilled labor relative to wages of
skilled labor in Mexico and in the United States as U.S.
offshoring occurred?
Both would rise.
Both would fall.
Wages of Mexican unskilled labor would rise, and
wages of U.S. unskilled labor would fall.
Wages of Mexican unskilled labor would fall, and
wages of U.S. unskilled labor would rise.

42 After NAFTA went into effect, movements in the wages

of Mexican skilled versus nonskilled workers:
were widely different from the U.S. pattern during
the same period.
were exactly the same as the U.S. pattern during
the same period.
matched the U.S. pattern until the start of NAFTA.
matched the Chinese experience.

43 When two countries open up for offshoring, in which

country does skilled labor tend to gain relative to
unskilled labor?
the skilled­labor­abundant country
the unskilled­labor­abundant country
neither country
both countries

44 When countries open up for offshoring, which country

will tend to specialize in research and development?
the skilled­labor­abundant country
the unskilled­labor­abundant country
neither country
both countries

45 Figure: A Firm's Production With and Without

Offshoring I
 Reference: Ref 7­1

(Figure: A Firm's Production With and Without Offshoring I)

In the graph, which line shows the initial level of production
for this firm?
Line A
Y0 (the curved­in line)
the bowed­out curved line
the vertical axis

46 Figure: A Firm's Production With and Without

Offshoring I

Reference: Ref 7­1

(Figure: A Firm's Production With and Without Offshoring I)

In “no­offshoring” equilibrium, how many units of component
production will there be?
60
80
 100
120

47 Figure: A Firm's Production With and Without

Offshoring I

Reference: Ref 7­1

(Figure: A Firm's Production With and Without Offshoring I)

In a “no­offshoring” equilibrium, how many units of R&D
production will there be?
60
80
100
120

48 Figure: A Firm's Production With and Without

Offshoring I

Reference: Ref 7­1

 (Figure: A Firm's Production With and Without Offshoring I)
Which line shows the relative prices of skilled versus
unskilled workers?
Line A
Y0 (the curved­in line)
the bowed­out curved line
the vertical axis

49 Figure: A Firm's Production With and Without

Offshoring I

Reference: Ref 7­1

(Figure: A Firm's Production With and Without Offshoring I)

Assuming skilled workers are needed for R&D and unskilled
workers are needed for components, if there is an increase
in the price for research and development products, this firm
will ________ those products, the demand for __________
will increase, the wages of these workers will rise, and the
price line in the graph will __________.
import; unskilled workers; become steeper
export; skilled workers; become flatter
neither import nor export; both workers in the same
proportion; not change
import; unskilled workers; become flatter

50 Figure: A Firm's Production With and Without

Offshoring I
 Reference: Ref 7­1

(Figure: A Firm's Production With and Without Offshoring I)

If component parts become relatively cheaper abroad, this
firm will have an incentive:
to offshore (import) components and export R&D.
to import R&D products along with skilled workers.
to export both R&D and component parts.
to make few changes in the trading regime because of
the delicate international balance.

51 Figure: A Firm's Production With and Without

Offshoring I

Reference: Ref 7­1

(Figure: A Firm's Production With and Without Offshoring I)

If this firm offshores its component production and exports
R&D, how many units of each will it have available in
equilibrium?
 60 R&D; 120 components
80 R&D; 80 components
100 R&D; 100 components
80 R&D; 200 components

52 Figure: A Firm's Production With and Without

Offshoring II

Reference: Ref 7­2

(Figure: A Firm's Production With and Without Offshoring

II) According to the combination of output shown by the
isoquant, Y1:
can be achieved using the present components and
R&D in the country.
is beyond the nation's capabilities to produce.
could be achieved by trading with another country.
is beyond the firm's capabilities to produce domestically
but could be achieved by trading with another country.

53 Figure: A Firm's Production With and Without

Offshoring II
 Reference: Ref 7­2

(Figure: A Firm's Production With and Without Offshoring

II) If the relative price of components is cheaper in a
foreign country than the home country, then:
it is likely that the home country will offshore the R&D
to the foreign country.
it is likely that the foreign country will offshore the
components to the home country.
it is likely that the home country will offshore
components to the foreign country.
no meaningful exchange is possible between the home
and foreign country.

54 Figure: A Firm's Production With and Without

Offshoring II
 Reference: Ref 7­2

(Figure: A Firm's Production With and Without Offshoring

II) If the home country offshores components to a foreign
country and then exports R&D to the foreign country and
imports components from the foreign country, then:
the exchange is not a beneficial one for the home
country.
the exchange results in an increase in output at lower
prices.
consumers benefit due to this offshoring.
the exchange results in an increase in output at lower
prices and the consumers benefit due to this offshoring.

55 Figure: A Firm's Production With and Without

Offshoring II
 Reference: Ref 7­2

(Figure: A Firm's Production With and Without Offshoring

II) If the world price of components falls, it is likely that:
the home country will import more R&D from the
foreign country.
the foreign country will get more R&D for its
components.
the home country will produce more R&D and trade it
for components.
there will be no impact on the home country.

56 Figure: A Firm's Production With and Without

Offshoring II
 Reference: Ref 7­2

(Figure: A Firm's Production With and Without Offshoring

II) If the price of R&D decreases, then it is likely that the
home country:
could see a decline in the amount of output produced.
will see a loss in comparative advantage in R&D.
could see a decline in the amount of output produced
and a loss in comparative advantage in R&D.
could see an increase in the amount of output
produced.

57 With the importation (offshoring) of components and

exportation of R&D, what happens to total production in
the economy?
It declines.
It becomes more expensive due to higher wages.
It increases, and—because it uses the same
amounts of labor—production is more efficient.
Productivity and efficiency decline.

58 As the home nation increases production of R&D by

devoting more skilled resources, its productivity rises
and its relative price rises. This situation creates:
lower gains from offshoring.
greater gains from offshoring.
no measurable gains from offshoring.
equal gains from offshoring.

59 An isoquant describes:
 combinations of two goods that a country can
produce if it fully and efficiently uses its resources.
combinations of goods that yield the same
satisfaction to consumers.
combinations of inputs that produce a constant level
of output.
combinations of value­chain activities needed to
produce output.

60 A country will find offshoring attractive when:

the international relative price of components is

greater than the home price of components.
the international relative price of components is less
than the home price of components.
the home relative price of components falls.
the international relative price of research and
development falls.

61 A country's terms of trade is:

its bargaining power in international agreements.

the price of its exports relative to its imports.
the price of its imports relative to its exports.
the price of a good in autarky compared with the
same good under free trade.

62 The economist Paul Samuelson analyzed a scenario in

which R&D production suffers from foreign competition,
thus lowering its price. Samuelson notes that foreign
competition in R&D will generally ____ the terms of
trade and national welfare if the nation exports R&D.
raise
lower
help
not affect

63 Samuelson's example is an analysis of a fall in export

prices, which _______________ the terms of trade,
and _______________ export volume. Samuelson's
point is that a country is _______________ in the
absence of trade.
improves; reduces; better off
worsens; reduces; better off
worsens; reduces; worse off
improves; reduces; worse off

64 The U.S. terms of trade for merchandise goods

_________ from 1994 to 2008.
 worsened
improved
did not change
first improved, then worsened

65 If the United States offshores high­skilled jobs:

it will always result in a net loss for the United

States.
it will increase the wages for high­skilled workers in
the United States.
it will result in gains for the United States, even
though there will be job losses.
it will result in losses in the foreign country.

66 Service offshoring in the United States from 1992 to

2000 is estimated to have had a _______________
effect on U.S. productivity and accounted for
_______________ of the total increase in productivity.
positive; 11% to 13%
negative; –10% to –20%
positive; 1%
positive; less than 5% to 6%

67 Combining offshoring of services and material inputs

may explain as much as ____ of the ________ in U.S.
productivity from 1992 to 2000.
10%; increase
20%; increase
10%; decrease
50%; decrease

68 Offshoring of very­high­skill medical and technology

services to other nations seems to contradict the value
chain model of offshoring. Which of the following could
be a reason?
The ratio of wages of lower­skilled workers to
higher­skilled workers in these other nations is
relatively lower than the same ratio for the United
States.
The wages of higher­skilled workers (such as
accountants) in these other nations are relatively
higher than in the United States.
Higher­skilled workers in India earn top money for
what they do.
The wages of higher­skilled workers (such as
accountants) in these other nations are relatively lower
than in the United States.

69 Offshoring of radiology services to countries such as

 India, Australia, and Israel is:

a major crisis to skilled technicians in the United

States.
going to cause the wages of American radiologists to
plummet.
not going to impact the market for radiologists,
because the skill is learned from years of experience.
proof that trade will always harm the United States.

70 Service activities that lend themselves well to

offshoring are ones:
for which very specific guidelines, rules, and
procedures may be written.
where the worker has to make a critical judgment
and this avoids lawsuits in the United States.
that do not require the worker to know any English.

that can be performed during the nighttime hours.

71 High­skill U.S. medical workers worry over losing their

jobs to foreign competition. Although some of these
activities can be offshored, the text makes which point
about medical offshoring?
Foreign medical workers do not have the same
training.
The scope for offshoring is limited because many
patient­care activities must be done on­site.
The medical profession would never allow foreign
medical workers to read X­rays or process lab work.
The text makes all these points.

72 Which of the following statements does NOT apply to

“nighthawk” firms?
They allow for more stable employment of
specialized workers in the home country.
They do tasks for other firms while they are closed.

In most cases, they compete for daytime jobs in the

home country.
None of these applies to “nighthawk” firms.

73 The ability to offshore some high­skill jobs to other

nations is often a factor in:
causing unemployment in the medical and legal
fields.
preventing those workers from coming to the United
States.
 allowing U.S. firms to continue the major portion of
their work and employment inside the United States.
keeping taxes low for U.S. firms.

74 The United States has seen an increase in offshoring of

service jobs because:
it is what consumers wanted.
it was possible to cut costs by importing these
activities.
it was mandated as part of a trade agreement.
other countries wanted to import small­scale
manufactured goods from the United States.

75 Economists note that one explanation of the seeming

paradox of offshoring high­skill jobs could be that an
offshoring model assumption has been violated. Which
of the following assumptions has been violated?
Capital is spread evenly and is available to all
offshored activities.
Workers can speak decent English.
Communications and data transmission costs are
low.
Workers in other nations abide by the same
standards in the workplace.

76 Why is the United States more likely to offshore skilled

service activities rather than unskilled manufacturing
activities to India?
Indian trade costs for manufacturing and service
activities are uniformly high.
Relative wages of less­skilled workers are lower in
India than in the United States.
Indian trade costs associated with service activities
are higher than those associated with manufacturing
activities.
Indian trade costs associated with service activities
are lower than those associated with manufacturing
activities.

77 Although offshoring of relatively unskilled

manufacturing component work to other nations would
seem to be profitable by the offshoring model:
it takes lots of negotiation with the governments of
those nations before they will allow it.
there are major language barriers.
there are major infrastructure problems, such as
transportation and bureaucracy.
the United States is prohibited from offshoring
manufacturing work.
78 Some service activities can be more successfully
offshored than manufacturing because:
the governments of those nations usually “look the
other way” in these areas.
there are no language barriers.
services often do not require physical
transportation, and communications costs have fallen
dramatically.
the United States is not prohibited from offshoring
service work.

79 If relative wages for unskilled workers are lower in a

foreign country, we would expect:
the home country to offshore tasks that require
skilled workers.
the foreign country to offshore tasks that require
unskilled workers.
the home country to offshore tasks that require
unskilled workers.
trade to be harmful for the home country.

80 India has a comparative advantage in service export for

all the following reasons EXCEPT:
India has a large number people who are educated
and conversant in English.
India is 12 hours ahead of Eastern Standard Time,
which makes it easier to offshore some jobs.
Service sector jobs do not require massive
infrastructure investment.
Indians are closer to Americans for historical
reasons, and hence the two countries like to trade with
each other.

81 Table: Labor Requirements

Assembly Component Office

Operations Production Services R&D
Unskilled U.S.: 4 U.S.: 3 U.S.: 2 U.S.: 1
Labor
India: 10 India: 8 India: 6 India: 4
Skilled Labor U.S.: 2 U.S.: 2 U.S.: 2 U.S.: 2
India: 10 India: 10 India: 10 India: 10

Reference: Ref 7­3

(Table: Labor Requirements) The table gives U.S. and Indian labor
requirements (hours per unit of output) needed in each of four
activities to produce the final product. Suppose that wages of
 unskilled and skilled workers are $10 and $20 in the United States
and $1 and $5 in India. What is the cost of conducting assembly
operations in the United States and India?
$6 in the United States and $20 in India
$60 in the United States and $20 in India
$80 in the United States and $100 in India
$80 in the United States and $60 in India

82 Table: Labor Requirements

Assembly Component Office

Operations Production Services R&D
Unskilled U.S.: 4 U.S.: 3 U.S.: 2 U.S.: 1
Labor
India: 10 India: 8 India: 6 India: 4
Skilled Labor U.S.: 2 U.S.: 2 U.S.: 2 U.S.: 2
India: 10 India: 10 India: 10 India: 10

Reference: Ref 7­3

(Table: Labor Requirements) The table gives U.S. and Indian labor
requirements (hours per unit of output) needed in each of four
activities to produce the final product. If trade costs are zero,
where is the value chain sliced? Which operations will the United
States offshore to India?
assembly operations only
assembly operations and component production
assembly operations, component production, and office services

assembly operations, component production, office services,

and R&D

83 Table: Labor Requirements

Assembly Component Office

Operations Production Services R&D
Unskilled U.S.: 4 U.S.: 3 U.S.: 2 U.S.: 1
Labor
India: 10 India: 8 India: 6 India: 4
Skilled Labor U.S.: 2 U.S.: 2 U.S.: 2 U.S.: 2
India: 10 India: 10 India: 10 India: 10

Reference: Ref 7­3

(Table: Labor Requirements) The table gives U.S. and Indian labor
requirements (hours per unit of output) needed in each of four
activities to produce the final product. Suppose that trade costs
represent 25% of wage costs in India. Now where is the value
 chain sliced? Which operations will the United States offshore to
India?
assembly operations only
assembly operations and component production
assembly operations, component production, and office services

assembly operations, component production, office services,

and R&D

84 Table: Labor Requirements

Assembly Component Office

Operations Production Services R&D
Unskilled U.S.: 4 U.S.: 3 U.S.: 2 U.S.: 1
Labor
India: 10 India: 8 India: 6 India: 4
Skilled Labor U.S.: 2 U.S.: 2 U.S.: 2 U.S.: 2
India: 10 India: 10 India: 10 India: 10

Reference: Ref 7­3

(Table: Labor Requirements) The table gives U.S. and Indian labor
requirements (hours per unit of output) needed in each of four
activities to produce the final product. Suppose that U.S. and
Indian wages of unskilled and skilled workers are $20,000 and
$60,000 per year (United States) and $1,000 and $5,000 per year
(India). What is the relative wage of skilled labor in the United
States?
$3/$1
$1/$3
$60/$1
$20/$1

85 Table: Labor Requirements

Assembly Component Office

Operations Production Services R&D
Unskilled U.S.: 4 U.S.: 3 U.S.: 2 U.S.: 1
Labor
India: 10 India: 8 India: 6 India: 4
Skilled Labor U.S.: 2 U.S.: 2 U.S.: 2 U.S.: 2
India: 10 India: 10 India: 10 India: 10

Reference: Ref 7­3

(Table: Labor Requirements) The table gives U.S. and Indian labor
requirements (hours per unit of output) needed in each of four
activities to produce the final product. Which country has a higher
 relative wage for skilled labor?
India
the United States
Both India and the United States have the same relative wages
for skilled labor.
The United States and India have the same relative wage for
unskilled labor.

86 Table: Labor Requirements

Assembly Component Office

Operations Production Services R&D
Unskilled U.S.: 4 U.S.: 3 U.S.: 2 U.S.: 1
Labor
India: 10 India: 8 India: 6 India: 4
Skilled Labor U.S.: 2 U.S.: 2 U.S.: 2 U.S.: 2
India: 10 India: 10 India: 10 India: 10

Reference: Ref 7­3

(Table: Labor Requirements) The table gives U.S. and Indian labor
requirements (hours per unit of output) needed in each of four
activities to produce the final product. Suppose that the United
States and India engage in offshoring. What will happen to the
relative wage for skilled labor in each country?
The Indian relative wage for skilled labor will increase, and the
U.S. relative wage of skilled labor will decrease.
The Indian relative wage for skilled labor will decrease, and the
U.S. relative wage of skilled labor will increase.
Both the Indian and U.S. relative wages for skilled labor will
increase.
Both the Indian and U.S. relative wages for skilled labor will
decrease.

87 What is the difference between “offshoring” and

“outsourcing? Provide an example of each.
Answer:

Offshoring refers to a company moving some

operations overseas but retaining ownership of those
operations though FDI. Outsourcing refers to a
company contracting a foreign company to produce its
final product or the intermediate goods used in those
final goods. An example of offshoring is Intel's
production of microchips in its plant located in China.
An example of outsourcing is Mattel's contracting the
production of Barbie dolls abroad.

88 Describe the value chain of activities involved in

 production.

Answer:

The value chain begins with the R&D needed to develop

the product. This R&D is used to produce the
components of the final product. They are assembled
into the final product, which is then marketed and sold
to consumers.

89 What parts of the value chain are likely to be

offshored?
Answer:

Activities using lower­skilled labor will be offshored if

wages of lower­skilled workers in the offshoring nation
are higher than those of workers overseas and if costs
of capital and trade do not offset the wage advantages
of using lower­skilled labor overseas. Usually, assembly
operations and production of components are
offshored.

90 What are the costs of capital and trade firms must

consider in making offshoring decisions?
Answer:

Capital and trade costs include higher costs of

constructing a plant overseas, higher costs of
transportation and communication, and extra costs
from foreign tariffs if the offshored operation has to
import component parts.

91 What prevents the skill­abundant country from

offshoring all parts of the value chain?
Answer:

Higher capital costs overseas and trade costs prevent

offshoring in this case.

92 What happens to the relative demands for and wages

of high­skilled labor in both the home country and the
outsourced (foreign) country when offshoring occurs?
Answer:

As activities in the middle of the value chain are

offshored, the relative demands for and wages of high­
skilled labor will increase in both countries. In the home
country, the demand for lower­skilled labor falls as
offshoring takes place. This increases the demand for
 high­skilled labor relative to lower­skilled labor, and
wages of high­skilled labor increase relative to lower­
skilled wages. In the foreign country, the offshored
activities are more skilled­labor intensive than occurred
in the previous production process, thus increasing the
demand for more skilled labor relative to lower­skilled
labor and increasing the wage of more­skilled labor
relative to those of lower­skilled labor.

93 What is skill­biased technical change? Provide an

example.
Answer:

It refers to when technology is developed that tends to

benefit skilled worker productivity more than unskilled
worker productivity. An example is the introduction of
computers into the workforce.

94 What did a study, cited in the text, of the increase in

relative wages and employment levels of skilled U.S.
worker find?
Answer:

The study found that 20% to 23% of the increase was

caused by a shift to offshoring and up to 37% was
attributable to capital investment in increased
technology.

95 Do changes of relative wages in the United States

follow predictions of the offshoring model?
Answer:

The offshoring model predicts that the relative wage of

high­skilled labor to lower­skilled labor should increase
as offshoring occurs. Suppose that production workers
(workers involved in assembly and component
production) are less skilled than non­production
workers involved in R&D, marketing and sales.
Offshoring should increase the relative wage of non­
production in regard to that of production workers. For
the United States, this relative wage in the
manufacturing sector was more or less stable during
the 1960s and 1970s, increased more or less
continuously from the early 1980s to the mid­late
1990s, declined until 2004, and then continued its
upward movement through 2010. This pattern is
consistent with the relative employment of
nonproduction to production workers in U.S.
manufacturing over the same time period. Offshoring is
one possible explanation of these patterns because of
 skilled­biased technological change. The text's authors
argue that it is difficult to conclude whether offshoring
or skill­biased technological change is more central to
explaining the pattern of U.S. relative wages.

96 Consider an offshoring model of reverse FDI in which

Foreign's offshore skilled labor activities to Home
because Home's skilled labor has a lower relative wage
than Foreign's skilled labor. Also assume that the costs
of capital and trade are uniform across production
activities.
A) Will Foreign's offshored production activities be high
or low on the value chain for a given product?
B) Suppose that Foreign uniformly increases its tariff
level, effectively increasing the cost of importing all
goods and services from abroad. How does this affect
the slicing of the value chain?
Answer:

A) Foreign's offshored production will be high on the

value chain because activities higher on the value chain
require more skilled labor than activities lower on the
value chain.
B)If Foreign increases tariffs on imports, the cost of the
offshored production returned to Home will increase;
that is, trade costs will rise, and it will be less likely
that it will continue to offshore.

97 What is the root of the apparent contradiction in Paul

Samuelson's statements regarding the benefits of trade
and the results of the theories discussed in the book?
Answer:

The difference is that Samuelson was comparing two

trade equilibria, and the theories compare autarky and
trade equilibria. A country can lose by moving from one
trade equilibrium to another, but cannot lose by moving
from autarky to trade.

98 What are the two ways in which offshoring can affect

the terms of trade in the offshoring country?
Answer:

Offshoring can affect a country's terms of trade if the

offshored (foreign) country improves its productivity in
the goods that it exports, thus lowering prices of its
exports 2003to the home (offshoring) country and if
the offshored (foreign) country improves its
productivity in the products that the home (offshoring)
country exports. In the first case, offshoring will
 improve the offshoring (home) country's terms of
trade. In the second case, offshoring will cause
deterioration in the offshoring (home) country's terms
of trade.

99 Does the authors' test of Paul Samuelson's terms of

trade effects indicate a significant deterioration in the
U.S. terms of trade on merchandise trade?
Answer:

No; since mid­1993, there has a more or less gradual

improvement in the U.S terms of trade for merchandise
goods.

100 Do recent trends in U.S. and Indian trade surpluses in

computer, insurance, and financial services suggest
that India will become a competitive challenge in
these service exports?
Answer:

Perhaps; though India's trade surplus in these service

activities is about two­thirds smaller that of the United
States, its surplus has been growing rapidly since
about 2004, while the rate of growth of the U.S.
surplus has slowed.

101 What does the article “How to Destroy American Jobs”

suggest would happen if the U.S. restricted
offshoring?
Answer:

The author argues that offshoring of some high­skill

jobs affected the U.S. economy by allowing U.S.
companies to retain major portions of their production
and employment in the United States. In particular, he
presents data indicating that U.S.­based
multinationals and U.S. affiliates of foreign­based
multinationals create high­paying jobs and conduct
significant research and development. In 2007, they
employed 27.5 million workers and conducted nearly
90% of all U.S. private­sector R&D.

102 Why might a home (offshoring) country consider

onshoring some of its foreign production?
Answer:

Disadvantages of foreign production such as high

shipping costs, complicated logistics, and quality
issues, as well as political unrest and intellectual
 property theft combined with home country
investment incentives may make onshoring appear
more attractive than continuing with overseas
production

103 Why is Caterpillar considering relocating some heavy­

equipment production to a new U.S. plant?
Answer:

Companies such as Caterpillar are seeing the

disadvantages of offshore production, including
shipping costs, complicated logistics, quality issues,
political unrest, and theft of intellectual property.

104 Why is China a favored destination for offshored

manufacturing and India a favored destination for
offshored services?
Answer:

Compared to China, India is relatively skilled­labor

abundant. Since services usually require skilled labor,
it has a comparative advantage to China in activities
using skilled labor.

105 What is the difference between “offshoring” and

“onshoring”? Provide an example of each.
Answer:

Offshoring refers to provision of a service or

production of components parts of a good in different
countries that are then used or assembled into a final
good in another location. Onshoring refers to firms in
the home (offshoring) country moving some of their
foreign production activities back to the home country.
An example of offshoring is Intel's production of
microchips, in its plant located in China. An example
of onshoring is General Electric's moving some of its
water heater production from China back to the United
States.

106 Provide an example of how the ability to offshore a

portion of the production process allows other
activities to remain in the United States.
Answer:

Consider the offshoring of radiology medical services.

The types of radiology jobs that can potentially be
transferred overseas are very limited. It is possible
that the work can be offshored domestically to firms
known as “nighthawks” that provide services to
hospitals during nighttime hours. Some nighthawk
firms located in the United States provide employment
to radiologists who otherwise might not be employed
because of a lack of round­the­clock demand for
radiologists on­site. Often these nighttime services are
used only for preliminary readings, leading to
immediate treatment of patients; the X­ray image is
then read again by the staff radiologist in the United
States the next day. Thus, in many cases, the jobs
providing the services being offshored are not directly
competing for the daytime jobs but, instead, are
complements to these U.S. jobs. Radiology is under no
imminent threat from offshoring because the
profession involves decisions that cannot be codified in
written rules. It follows that the work cannot be
offshored except for the nighttime activities of
nighthawk firms, which actually work in conjunction
with the daytime activities in major hospitals.