Outsourcing Flashcards
(30 cards)
What is outsourcing?
Outsourcing is the business practice of hiring an external company or individual to handle tasks or processes that could otherwise be performed in-house. It involves trade in intermediate inputs, unlike the final goods in Ricardian or HO models.
How is outsourcing different from traditional trade models like Ricardian or Heckscher-Ohlin (HO)?
Traditional trade models focus on final goods, whereas outsourcing involves trade in intermediate inputs within a value chain.
Why was outsourcing rare historically?
High trade and coordination costs made outsourcing rare. Most production happened within a country or a single workshop.
What has enabled the rise of outsourcing in modern times?
Advances in telecommunication and logistics have reduced coordination and shipping costs, making outsourcing more profitable.
What is meant by ‘slicing the value chain’?
It refers to transferring parts of the production process abroad based on the skill intensity of the activity, where unskilled-labor-intensive tasks are outsourced.
How does a firm decide which activities to outsource?
By lining up production activities by skill intensity, firms outsource unskilled-labor-intensive tasks to low-wage countries and retain skilled-labor-intensive tasks domestically.
How is outsourcing similar to the HO model?
Countries specialize in activities that use their abundant resources. Outsourcing lets firms import cheaper inputs (like unskilled labor tasks), similar to how countries trade based on factor endowments.
What does the PPF show in the outsourcing model?
It shows the trade-off in resource allocation between components and R&D activities using skilled and unskilled labor.
How do isoquants illustrate gains from outsourcing?
They show higher output levels when firms can source components cheaper from abroad, shifting production and increasing total output.
What happens if the world price of R&D decreases?
Developing countries start competing in R&D, lowering prices. Home firms lose comparative advantage, leading to welfare losses.
What happens if unskilled wages rise in developing countries?
Relative cost of components rises, making outsourcing less attractive, and affecting firms’ outsourcing decisions.
What happens if the price of components falls due to productivity gains?
Home firms gain more from outsourcing, leading to increased output and welfare.
How does iPhone production illustrate outsourcing?
Apple designs in the US, sources components globally, and assembles in China, showing global division based on value chain efficiency.
Which textbook provides a detailed framework for understanding outsourcing?
International Economics by Robert Feenstra and Alan Taylor, especially Chapter 7.
What historical example illustrates early outsourcing?
Damascus swords: ore from India was smelted and forged into blades in the Middle East, showing early form of international production splitting.
What is ‘slicing the value chain’ in the context of outsourcing?
It refers to transferring the most unskilled-labor-intensive production tasks abroad, while keeping skilled-labor-intensive tasks at home.
Why does Home outsource components in the outsourcing model?
Because components are unskilled-labor-intensive and Foreign has lower unskilled wages, making it cost-effective to import them.
What happens to Home’s output when it outsources components?
Home can increase its final output as outsourcing components allows more resources to be allocated to R&D, leading to higher isoquant levels.
In the outsourcing diagram, what does point A represent?
Point A is the autarky equilibrium where components and R&D are both produced domestically.
In the outsourcing diagram, what does point C represent?
Point C is the outsourcing equilibrium where the firm imports components, exports R&D, and reaches a higher isoquant (greater output).
What is the effect of outsourcing on skilled labour demand in Home?
Outsourcing increases the demand for skilled labour in Home as it focuses on R&D, raising the relative wage for skilled workers.
What is the effect of outsourcing on skilled labour demand in Foreign?
Foreign focuses on components, which are unskilled-labour-intensive, so demand for skilled labour may remain low.
Why do relative wages for skilled labour increase in Home after outsourcing?
As Home specialises in R&D, which requires skilled labour, demand and wages for skilled workers increase.
