Economics Of Globalization Set 2

Front 1

Consider an outsourcing model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production activities.

Will Home’s outsourced production activities be high or low on the value chain for a given product? That is, will Home outsource activities that are skilled-labor intensive or unskilled-labor-intensive? Explain.

Back 1

The high relative wage of Home skilled labor makes skilled-labor intensive activities more expensive at Home relative to Foreign. Equivalently, the low relative wage of unskilled labor makes unskilled-labor-intensive activities less expensive at Home relative to Foreign. As a result, Home will undertake production activities lower on the value chain while outsourcing higher value activities to Foreign.

Front 2

Consider an outsourcing model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production activities.

Suppose that Home uniformly increases its tariff level, effectively increasing the cost of importing all goods and services from abroad. How does this affect the slicing of the value chain? ​

Back 2

A uniform increase in the tariff level causes fewer activities to be outsourced. The slicing of the value chain reflects this increased cost as a rightward shift; Home expands the set of activities that it does at Home to include incrementally higher value activities, whereas the set of high value outsourced activities shrinks.

Front 3

Consider an outsourcing model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production activities.

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?

Back 3

An expansion in the set of production activities done at Home (to include higher value ones) increases the average skill intensity of Home production. This increases the relative demand for skilled labor at Home. Similarly, because Foreign ceases to do its least skill-intensive activities, the average

Front 4

The term globalization refers to...

Back 4

imports and exports of goods and services

movement of labor across borders (migration)

movement of capital across borders (foreign direct investment)

Front 5

What is NOT a measure of the globalization?

Back 5

The level of total unemployment in a country

Front 6

What is NOT a main factor explaining the first wave of globalization:

Back 6

the development of commercial aviation

Front 7

A current account surplus implies that:

Back 7

national savings are larger than investments, so capital flows out of the economy.

Front 8

If relative wages for unskilled workers are lower in the foreign country, we would expect:

Back 8

The home country to outsource tasks that require unskilled workers.

Front 9

“Greenfield investment” is defined as

Back 9

Construction of a new factory in a foreign country

Front 10

When should firms use foreign direct investment as a strategy to expand globally?

Back 10

Whenever the firm owns a technology that is difficult to contract out or to set a price for in the open market

Front 11

Which of the following argument justifies the need of a multilateral trade agreement?

Back 11

With no formal commitment device, countries pursue their special interest, which leads to a less than optimal outcome