QUESTION 6

Consider the Grossman-Rossi Hansberg model of offshoring. There

are two goods: X and Y.

Good X requires 4 units of unskilled labour to do Task 1 and 4

additional units of unskilled labour

to do Task 2. Further, 2 units skilled labour is also necessary

to organize production of Good X.

Good Y requires 2 units of unskilled labour to do Task 1 and 2

additional units of unskilled labour

to do Task 2. Besides, 4 units skilled labour is also necessary

to organize production of Good Y.

The prices of both goods are fixed on world markets at $24 per

unit. Initially, all tasks were

performed domestically, but now it becomes possible to perform

Task 1 in another country

(offshoring) for free.

Part A.

What is the wage skilled and unskilled workers receiving befor

e offshoring? Show

your work.

(4 marks)

Part B.

What is the wage skilled and unskilled workers receiving afte

r offshoring? Show

your work.