In a graph similar to Figure 7-12, illustrate the no-trade equilibrium, , for the Foreign firm. 

a. Supposing Foreign engages in international trade, add the world relative price of components to your graph. Indicate the Foreign firm’s resource allocation and production of the final goods when it faces the new price line.

b. Illustrate the gains or losses faced by the firm relative to the initial offshoring equilibrium, assuming a fall in the price of components.

Transcribed Image Text:

R&D Home firm exports of- R&D World relative price of components (P/PR)WI No-trade relative price of components - (PC/PR)^ Activities done by the Home firm in offshoring equilibrium Activities used as inputs to " Home firm with offshoring Home firm imports of components Y₁ Yo Feenstra/Taylor, International Trade, Se © 2021 Worth Publishers Gains from offshoring Components