In Layman terms

4. Consider a U.S. firm's production of automobiles, including research and development and compo- nent production. a. Starting from a no-trade equilibrium in a PPF diagram, illustrate the gains from offshoring if the United States has a comparative advantage in component production. b. Now suppose that advances in engineering abroad decrease the relative price of research and development. Illustrate this change on your diagram and state the implications for produc- tion in the United States.R&D Home firm PPF Relative price of components = (PC/PR) A No-trade Home firm equilibrium No-Trade Equilibrium for the Home Firm The PPF shows the combinations of components and R&D that can be produced by a firm with a given amount of labor and capital. In the absence of offshoring, the firm produces at A, using quantity Qc of components and QR of R&D to produce Home firm amount Yo of the final good. The line tangent to isoquants the isoquant at point A measures the value that the firm puts on components relative to R&D, or their relative price, (Pc /PR)4. Amount Y, of the Components final good cannot be produced in the absence of offshoring because it lies outside the firm's PPF