KEY POINTS

1. The provision of a service or the production of various parts of a good in different countries for assembly into a final good in another location is called foreign outsourcing or offshoring.
2. We can apply the same ideas that we developed for trade in final goods among countries to the trade of intermediate offshored activities. For instance, if low-skilled labor is relatively inexpensive in the Foreign country, then the activities that are least skill-intensive will be offshored there, and Home will engage in the activities that are more skill-intensive.
3. We can also predict what happens to relative wages of skilled labor when there is a change in trading costs and more offshoring. Our model predicts that the relative demand for skilled labor increases in both countries. This result helps to explain the observation that relative wages have been increasing in the United States and in other countries at the same time.
4. In an overall sense, there are gains from offshoring, because the specialization of countries in different production activities allows firms in both countries to produce a higher level of final goods. That increase in output represents a productivity gain, and the gains from trade.
5. With service offshoring, it is possible that a country like India will have rising productivity in activities in which the United States has comparative advantage, such as R&D. Rising productivity in India would lead to a fall in the price of R&D, which is a terms-of-trade loss for the United States. For that reason, the United States could lose due to service offshoring, though it still gains as compared with a situation of no offshoring at all.