Offshoring of Goods and Services End of Chapter Question

Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:

Components: Total costs of production = P_C Q_C = 200

Earnings of high-skilled labor = W_H H_C = 20

Earnings of low-skilled labor = W_L L_C = 80

Earnings of capital = R K_C = 100

Share of total costs paid to high-skilled labor = 20/200 = 10%

Share of total costs paid to low-skilled labor = 80/200 = 40%

R&D: Total costs of R&D = P_R Q_R = 200

Earnings of high-skilled labor = W_H H_R = 80

Earnings of low-skilled labor = W_L L_R = 20

Earnings of capital = R K_R = 100

Share of total costs paid to high-skilled labor = 80/200 = 40%

Share of total costs paid to low-skilled labor = 20/200 = 10%

1) Suppose that due to the opening of trade, the price of components falls by P_C/P_C = -10%, and the price of R&D remains unchanged, P_R/P_R = 0. Calculate the change in the wage of skilled and low-skilled labor.

Wage_High-skilled= %

Wage_{Low-skilled= %}