Have no idea to how to start the Homework

punirm510
timer Asked: Feb 1st, 2016

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Win2016_ECON3107_HW3.pdf here is the link

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ECON3107: Global Economic Analysis Winter 2016 Hee Yeul Woo heeyeul.woo@csueastbay.edu Homework 3 Due: Feb. Nov. 2, 2016 1. Consider an offshoring model in which: • Home’s wages for highly and less skilled labors are higher than Foreign’s. ∗ WH > WH and WL > WL∗ , • Home’s skilled labor has a higher relative wage than Foreigns skilled labor, (a different assumption from the example used in class) WH W∗ > H∗ , and WL WL • The costs of trade are uniform across production activities (as we assumed in class). Answer the following questions. (a) Will Home offshore activities that are high-skilled labor intensive or low-skilled labor intensive? Explain. (b-i) Suppose that Home uniformly increases its tariff level, effectively increasing the cost of trade. Will Foreign offshore more of activities or less of activities? Explain. (b-ii) Draw relative labor supply and demand diagrams for Home and Foreign showing the effect of this change. What happens to the relative wage in each country? 2. Consider a Home production of TVs (the final good) including R&D and component production. (a) Draw a hypothetical PPF for the Home company (component on the horizontal axis and R&D on the vertical axis). Let PC PR be the relative price of components in the absence of offshoring. Choose a point on the PPF and call it an equilibrium in the absence of offshoring and draw a line reflecting PC PR . (b) Now consider an equilibrium with offshoring for which the world relative price of com W C ponents is P . Illustrate the gains from outsourcing if Home has a comparative PR  W 1 PC C advantage in component production, that is, P . PR < PR  W 1 C (c) Now suppose that the relative price of components rises further, that is, P < PR  W 2 PC . Are terms of trade improved or worsened? Illustrate the impact of this change PR in terms of trade on the production of TVs on your diagram. 1
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