Chapter 7. Chapter 7

Work It Out
Chapter 7
true
true

Question 7.1

Consider an offshoring model in which the hours of labor used in four activities in the United States and Mexico are as follows. Note that labor hours in Mexico are twice those in the United States, reflecting Mexico’s lower productivity. Also note that the ratio of high-skilled to low-skilled used in each activity increases as we move to the right, from 1/6 in assembly, to 10/1 in R&D. Suppose that the wage of U.S. low-skilled workers is $10 per hour and that of high-skilled workers is $25 per hour, and that the wage of Mexican low-skilled workers is $1 per hour and that of high-skilled is $5 per hour (these values are made up to be convenient, not realistic). Also suppose that trade costs are 25%, 30%, or 50%, which means that an additional 25%, 30%, or 50% is added to the costs of offshoring to Mexico.

Hours of Labor Used in Each Activity (per unit of output)

Assembly Component Production Office Services R&D
Low-skilled labor Mexico: 24 Mexico: 16 Mexico: 16 Mexico: 4
U.S.: 6 U.S.: 4 U.S.: 4 U.S.: 1
High-skilled labor Mexico: 4 Mexico: 4 Mexico: 8 Mexico: 40
U.S.: 1 U.S.: 1 U.S.: 2 U.S.: 10
High-skilled/Low-skilled ratio 1/6 1/4 1/2 10/1


a. Fill in the blank cells in the following table by computing the costs of production of each activity in each country (two cells are filled in for you).
Hint: round your answers to two decimal places where necessary.

Assembly Component Production Office Services R&D
Mexico $44 $ 0uygms1MgYer//yd5gkB77dEzB/bHBCEKuxgHc36SNzCfCFBINHOl9M9ZoK8fX+z0pIIBSpwo/qW/83vTB/aLDcOB06ZGoMIUhT83O0PJ12yjy5E $ mYLc32O6aSV3X+L9gdqxcJL0W6vYamopDDvY9AKNSrHXYw6VIobPpAr7kOpQP6mvovq9JQ5mxwLvuXaQ8MdMwdH+Zbtbj5MV1/Z4VYoL5ZU= $ IAve2dSbH/vrr7CW7CE6IvzPpUQKAGptxX8EZPoJQc09AFkI5ISDRqaNjBj7MiarN7h2lvs3SXVVAXcCj57KeW+uD2pkfCEQX/EOrQ==
United States $ ntJD/XEEJNiqpvvg9CftD8FcUA8FOil8FWApRO34/6by2B7VOwcKmvEvApw7MUDvCxOby2jkaL5Au9Sflm/lfEkT6bZkcYbI+JInjo3jK0k= $ 3lq5f+ziNqGy72KDUyp9JRkwsiHBFFv90wcRa8bC8dKuWtvV98+1O15Jv+s1ZffRUHoB0oeMGAkxfapKph3ust3u8K4mb2DWpQ+a+reOuRE= $ uDAaIWjtYEHyhi0VgCuU+3kaeK7E0y9BxhwKZVFzMp/cDWUe2EAVIdtCS2Icq69QNrwcAEFQq3VivtZdiwMoSrgVuaalDagDXDA0uJ9egRk= $ xZyl6PgwVhFw2d2RpssRBFYCxZf7oeO/3kBXtOe+r9YE4Cm0PGczLQO3V6SC84ZQMgnx6Y2kYgeu8A8jdBEPQZ4kXOXiw3NjFDTucA==
Imported by United States
from Mexico; Trade costs = 20%		 $ gYjUdp8A5Wt4RIOyYN3Bn3sSh+21hW86PDk0E5BDx8hKkYIZPEXG/fONCvxxIOLjTwB9OrRwinxuvwkIDugLyP7b+h5ybSosyqzzOdmxK5RfxH8WYLqH4w== $ kvURuzPuiuI6ssH8cy3yrFAtvj9B92Sy52BdDXjsZA/xrM1e7yTs/Hsp0aZuYi5Sys4tk/YYsMdnQ6794UGc3af/Tel50VyWh25JsKayedwEbUoeiMQErg== $ NotfTkmORCXe89O2E9ceBsNaP2FtXXLwSr6+xXrQfTe/FkcY+enCwLR4JYtgi4Rnppp0BRXsaBmeScjuWuPkyQ8WNK+HJki/x8LaIRKyHRR7YlGO $ AFS7cxJG8Jz5BgUa3q9/jH2vN5g3/TVW2/WGDKIin4Fh960/Rt7iic3/wwkt8o9JACBZcy1+dE1agJw+0VauYNU3zJWlDzggXodO+IGgxlzU517v
Imported by United States
from Mexico;
Trade costs = 30%		 $57.2 $ Y5n8im6J1UNHi+SEpEe5KZN8nSsILrArPMYqj8rv6+LtRjq3l1gCRl3/fn6Mb0A5SLkWyO4ot/e/ioDuyS49N82HhbBwOi24Wfs1qP5dh/W1Te+Hwg4fKA== $ lmTcDYB52/S4CnomyElJ4WCnK6HeqkqniC/CE3oMDQ/yj5alNjHMsEoKeLIAe5q4DZDHJ8l5CJJz6CER6x/6Cn5QaCBZmNLWLZUv96pdz6Sqm+Qs $ KopA1L38uJbybOMlTEhvu84usu39P3vv/nzjJpJHxCTFVVnj3Q1NsQaZjfrsVZFNp4bTGBQCh/4dTJ2O+vcqA8+YmhuzUKGa3dh9GRANR1vpuYHb
Imported by United States
from Mexico;
Trade costs = 50%		 $ Bd+enY8uED4AhMYXF8IVoqbr3wnPO3arNMLaDokkp4eKlQKjMv+EZLnBiyBhHLY/1NmG4pAJeoFC5HmwHhsBEwfQm7qCopcpy3epGMNoKVKDu0np $ B1e/7NnXDvhWTytpXezK0VMN7kRqTpM62drbgBQITgKTqJIqdQHdMiGdQDL+DDwNzu59+XrE3Uiq14b2WrBo9MPmY8aHVU8K7J3/6Vs+Qm9nwvyh $ i5Rmxmdj+FyTu8uL2pTpb/bIvWMn6tKbC/DLVqDt33xN3X159kpKckXQludKcn8/SAWmwCOkBMGGZN/0sGOCckHktwLFhjMGQIJhYe1Msi3X7F2T $ WP8z+OlV7x3Lov8MzG6YxCSUozF20sD5TMJZ04W3zfordQGIQQWlkSuer/n/08ugNBUCC3u4FoYVt9v7TpzlZ6bH1m3MdBSghYEhgZPWRdk=
Correct. The cost of any given activity in any given country is equal to the number of hours of low-skilled labor required for that activity multiplied by the hourly wage for low-skilled labor plus the number of hours of high-skilled labor required for that activity multiplied by the hourly wage for high-skilled labor. For example, the cost of assembly in Mexico is equal to 24 hours of low-skilled labor multiplied by $1 per hour plus 4 hours of high-skilled labor multiplied by $5 per hour, which is equal to [MATH: \$24+\$20=\$44 ](24 dollars plus 20 dollars equals 44 dollars) . To determine the cost with trade costs included, you multiply the cost of production for any given activity in Mexico by the trade cost percentage and then add that to the activity cost. For example, to find the total cost of assembly in Mexico with 20% trade costs, multiply $44 by 20% and add $44, which is equal to [MATH: \$8.8+\$44=\$52.8 ](8.8 dollars + 44 dollars equals 52.8 dollars)
Incorrect. The cost of any given activity in any given country is equal to the number of hours of low-skilled labor required for that activity multiplied by the hourly wage for low-skilled labor plus the number of hours of high-skilled labor required for that activity multiplied by the hourly wage for high-skilled labor. For example, the cost of assembly in Mexico is equal to 24 hours of low-skilled labor multiplied by $1 per hour plus 4 hours of high-skilled labor multiplied by $5 per hour, which is equal to [MATH: \$24+\$20=\$44 ](24 dollars plus 20 dollars equals 44 dollars) . To determine the cost with trade costs included, you multiply the cost of production for any given activity in Mexico by the trade cost percentage and then add that to the activity cost. For example, to find the total cost of assembly in Mexico with 20% trade costs, multiply $44 by 20% and add $44, which is equal to [MATH: \$8.8+\$44=\$52.8 ](8.8 dollars + 44 dollars equals 52.8 dollars)
Video transcript

Work It Out, Chapter 7, Question 1

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)

This problem will ask you to solve for the costs of production of different activities in the United States and Mexico, as well as the costs of activities imported by the United States from Mexico with trade costs of 20 percent, 30 percent, and 50 percent, and to fill in a chart with this information. Let’s look at the information given.

(Description)

The following text is written: Wages in the United States: Low-skilled: 10 dollars per hour. High-skilled: 25 dollars per hour. Wages in Mexico: Low-skilled: 1 dollars per hour. High-skilled: 5 dollars per hour.

(Speaker)

We’re told that the wages of U.S. low-skilled workers are 10 dollars per hour and those of high-skilled workers are 25 dollars per hour, and that the wages of Mexican low-skilled workers are 1 dollar per hour and those of high-skilled workers are 5 dollars. These values are made up to be convenient, not realistic. We’re also given the hours of labor used in each activity, per unit of output.

(Description)

The table labeled Hours of Labor Used in Each Activity (per unit of output) is briefly shown. The table consists of 4 columns: Assembly, Component Production, Office Services, R&D. The table consists of 3 rows: Low-skilled labor, High-skilled labor, High-skilled/Low-skilled ratio. The column Assembly has the following data: Mexico: 24, U.S.: 6; Mexico: 4, U.S.: 1; one-sixth. The column Component Production has the following data: Mexico: 16, U.S.: 4; Mexico: 4, U.S.: 1; one-fourth. The column Office Services has the following data: Mexico: 16, U.S.:4; Mexico: 8, U.S.: 2; one-half. The column R&D has the following data: Mexico: 4, U.S.:1; Mexico: 40, U.S.: 10; 10 over 1.

(Speaker)

With this information, we can now compute the costs of production of each activity and fill in the chart.

(Description)

The following table is shown. The table consists of 4 columns: Assembly; Component Production; Office Services; R&D. The table consists of 5 rows: Mexico; United States; Imported by United States from Mexico, Trade costs equals 20 percent; Imported by United States from Mexico, Trade costs equals 30 percent, Imported by United States from Mexico, Trade costs equals 50 percent. The column Assembly has the following data: 44 dollars, 85 dollars, 52.8 dollars, 57,2 dollars, 66 dollars. The column Component Production has the following data: 36 dollars, 65 dollars, 43.2 dollars, 46.8 dollars, 54 dollars. The column Office Services has the following data: 56 dollars, 90 dollars, 67.2 dollars, 72.8 dollars, 84 dollars. The column R&D has the following data: 204 dollars, 260 dollars, 244.8 dollars, 265.2 dollars, 306 dollars.

(Speaker)

The cost of any given activity in any given country is equal to the number of hours of low-skilled labor required for that activity multiplied by the hourly wage for low-skilled labor plus the number of hours of high-skilled labor required for that activity multiplied by the hourly wage for high-skilled labor. For example, the cost of assembly in Mexico is equal to 24 hours of low-skilled labor multiplied by 1 dollar per hour plus 4 hours of high-skilled labor multiplied by 5 dollars per hour, which is equal to 24 dollars plus 20 dollars equals 44 dollars. To determine the cost with trade costs included, you multiply the cost of production for any given activity in Mexico by the trade cost percentage and then add that to the activity cost. For example, to find the total cost of assembly in Mexico with 20 percent trade costs, multiply 44 dollars by 20 percent and add 44 dollars, which is equal to 8 dollars and 8 cents plus 44 equals 52 dollars 8 cents. Using this method, we can complete the chart as shown.

Question 7.2

b. With trade costs of 50%, where is the value chain sliced? That is, which activities are cheaper to import from Mexico, and which are cheaper to produce on the United States?

w8iPzFKUguJskiKK49GHF7Kb2tQVPwJTG89EkNJXXV/9ozn1fEEc/nKFsYXxLgPTZMjMYdI2EIGAlt+sJij8Wop1teZHj6GV0M4ue+5xwf6BDBWaluSN6vxM2QIq3c1alaahQKA8aWMtxL3uGgwCzETUIMFk2K616AT0dW3jk8QcIx9+ Womm/yc2R124FLp30nB3S4vc3Ic1ZsABt03hMBddlbViA23qLD7Ma3WiMvHkEIqRFt2zY/pTiR8YtoqI1jPTbP61+/k8sc43Sbu5kheAD9MHMxs9f5wuxA== 6aNHFWzpwwcXHnVp/9eXTE8nmi6NGeIciYji2h2QDjdSn9LnDoKO3qvUJHnEkD/kP8uXhroKkR5nZPjpS6Ocz5s2v+2WBx8LFhqsBg== iU+yAH1guzhex+roHvEhIWGfeS8skWJpJdTPB4oNXfvvEPGhsdrk972xOKxL1Xn57+Vehhr1Z6TZFxBA
Correct. Compare the total cost of the activities imported by the United States from Mexico with trade costs at 50% to the cost of the activities in the United States. Assembly costs $85 in the United States and $66 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$66 < \$85 ](66 dollars is less than 85 dollars), the United States will import assembly. Component production costs $65 in the United States and $54 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$54 < \$65 ](54 dollars is less than 65 dollars), the United States will import component production. Office services cost $90 in the United States and $84 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$84 < \$90 ](84 dollars is less than 90 dollars), the United States will import office services. R&D costs $260 in the United States and $306 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$306 > \$260 ](306 dollars is greater than 260 dollars), the United States will conduct R&D in the United States.
Incorrect. Compare the total cost of the activities imported by the United States from Mexico with trade costs at 50% to the cost of the activities in the United States. Assembly costs $85 in the United States and $66 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$66 < \$85 ](66 dollars is less than 85 dollars), the United States will import assembly. Component production costs $65 in the United States and $54 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$54 < \$65 ](54 dollars is less than 65 dollars), the United States will import component production. Office services cost $90 in the United States and $84 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$84 < \$90 ](84 dollars is less than 90 dollars), the United States will import office services. R&D costs $260 in the United States and $306 when imported by the United States from Mexico with trade costs of 50%, so because [MATH: \$306 > \$260 ](306 dollars is greater than 260 dollars), the United States will conduct R&D in the United States.
Name

Work It Out, Chapter 7, part b

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This problem will ask you to determine where, with trade costs of 50 percent, the value chain will be sliced, or in other words, which activities are cheaper to import from Mexico, and which are cheaper to produce in the United States? In order to answer this question, we must compare the total cost of the activities imported by the United States from Mexico with trade costs at 50% to the cost of the activity in the United States.

(Description)
The following table is shown. The table consists of 4 columns: Assembly; Component Production; Office Services; R&D. The table consists of 3 rows: Mexico; United States; Imported by United States from Mexico, Trade costs equals 50 percent. The column Assembly has the following data: 66 dollars; 85 dollars; 66 dollars is less than 85 dollars, import. The column Component Production has the following data: 54 dollars; 65 dollars; 54 dollars is less than 65 dollars, import. The column Office Services has the following data: 84 dollars; 90 dollars; 84 dollars is less than 90 dollars, import. The column R&D has the following data: 306 dollars; 260 dollars; 306 dollars is bigger than 260 dollars, produce in United States.

(Speaker)
Assembly costs 85 dollars in the United States and 66 dollars when imported by the United States from Mexico with trade costs of 50%, so because 66 dollars is less than 85 dollars, the United States will import assembly. Component production costs 65 dollars in the United States and 54 dollars when imported by the United States from Mexico with trade costs of 50 percent, so because 54 dollars is less than 65 dollars, the United States will import component production. Office services cost 90 dollars in the United States and 84 dollars when imported by the United States from Mexico with trade costs of 50 percent, so because 84 dollars is less than 90 dollars, the United States will import office services. R&D costs 260 dollars in the United States and 306 dollars when imported by the United States from Mexico with trade costs of 50 percent, so because 306 dollars is bigger than 260 dollars, the United States will conduct R&D in the United States.

Question 7.3

c. With trade costs of 30%, and then 20%, where is the value chain sliced?

bDWFoE0eJkHt0XuRp2+/05+0GYUbebdkt9wRprlAv0SlIcZ8KoZC/YBg0BEOlWIPv0z7pdy/gZINJcPvLjktgq+L60Byx+MbcW9v0CLDDhq2njrVIXve9CPqZJRGf9oGnNugUpoqYSu2FVZ47oyaLNLt+QdvzmTktKweab1ZJM3L7Fti Zf3o8Ejegb1MN2SxKrDfnZlhE9wuKamvTLO78B8wPpknL1d/54IFtNjZXXeGD1DGXl43iqhzCTJFFNM2FKQkbA== +YD7Gtn4pl68kWyTBhutLispll/39G6nuELSdjZINH9AvoauXph9AVSY4x43sP6P4cehyOEVxMabfzkJONqPbXEG5awz5OwjhO25inhO0LTyHIgajTuHZ/7V02kCVNskfi5UCyNJGbLg2HHh
sdfsdfs
HTML: <table number="7.2" id="table_feed"> <caption>Here is the table with the correct answers.</caption> <tbody> <tr> <th/> <th class="meta-class-tag [id=assembly] [scope=col]">Assembly</th> <th class="meta-class-tag [id=component] [scope=col]">Component Production</th> <th class="meta-class-tag [id=office] [scope=col]">Office Services</th> <th class="meta-class-tag [id=rnd] [scope=col]">R&amp;D</th> </tr> <tr> <th class="meta-class-tag [id=mexico] [scope=col]">United States</th> <td>$85</td> <td> $65 </td> <td> $90 </td> <td> $260 </td> </tr> <tr> <th class="meta-class-tag [id=units] [scope=col]">Imported by United States from Mexico; Trade costs = 20%</th> <td> $52.8 Less than the cost in the United States. Import. </td> <td> $43.2 Less than the cost in the United States. Import. </td> <td> $67.2 Less than the cost in the United States. Import. </td> <td> $244.8 Less than the cost in the United States. Import. </td> </tr> <tr> <th class="meta-class-tag [id=imported1] [scope=col]">Imported by United States from Mexico; Trade costs = 30%</th> <td> $57.2 Less than the cost in the United States. Import. </td> <td> $46.8 Less than the cost in the United States. Import. </td> <td> $72.8 Less than the cost in the United States. Import. </td> <td> $265.2 More than the cost in the United States. Produce in the United States. </td> </tr> </tbody> </table>
Name

Work It Out, Chapter 7, part c

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This problem will ask you to determine where the value chain will be sliced with trade costs of 30 percent, and then 20 percent. In order to answer this question, we must compare the total cost of the activities imported by the United States from Mexico with trade costs at first 30% and then 20 percent to the cost of the activity in the United States. We can best do this using the chart we completed in part (a).

(Description)
The table from part a is shown. The row, Imported by United States from Mexico; Trade costs equals 50 percent, is removed from the table. The text 'Less than the cost in the United States. Import.' is added to the values in the second and third rows, except the value in the third row and fourth column, where the text 'More than the cost in the United States. Produce in the United States.' is added.

(Speaker)
We can see that with trade costs of 20 percent, all activities are offshored to Mexico, whereas with trade costs of 30 percent, assembly, component production, and office services are done in Mexico, and R&D is done in the United States.