Outsourcing & Product Fragmentation

Figure 8.1 Comparative and Absolute Advantage

Figure 8.2 Costs and Fragmentation

1/w 1/r L K -w/r Isocost Line C = $1

F=1/p F C=1/p C 1/w 1/r L K -w/r

Figure 6.5 Unit-Value Isoquants

F=1/p F C=1/p C 1/w 1/r L K -w/r H G B F A

F=1/p F C=1/p C 1/w 1/r L K -w/r H B F C=1/p' C 1/w' 1/r' w'/r' Increase in the Price of Cloth

1/w 1/r L K k B A Indicated prices infeasible with this endowment of capital and labor Indicated prices feasible for all endowments within the cone Diversification Cone

Hammer Production HANDLE HEAD

Hammer Production HANDLE HEAD HAMMERS = min{heads,handles}

Hammer Production HANDLE HEAD HAMMERS = min{heads,handles} heads = min{L,0.5K} handles = min{0.5L, K}

heads = min{L,0.5K} handles = min{0.5L, K} head 1 handle 1/2 head 1/2 handle Hammer Production K L

HANDLE HEAD HAMMERS = min{heads,handles} heads = min{L,0.5K} handles = min{0.5L, K}

heads = min{L,0.5K} handles = min{0.5L, K} head 1 handle 1/2 head Hammer Production K L HAMMERS = min{heads,handles}  H = min{1/3L,1/3K}

heads = min{L,0.5K} handles = min{0.5L, K} head 1 handle Hammer Production K L HAMMERS = min{heads,handles}  H = min{1/3L,1/3K} 1 hammer

Figure 8.3 Fragmentation in Industry 2

Figure 8.4 Fragmentation and a Higher Wage Rate

Suppose, in Fig 8.3, that this country has an advantage, relative to the rest of the world, in producing the labor-intensive fragment, B, instead of the capital- intensive fragment A, so that after world prices adjust to separate fragments becoming tradable on the world market, it is fragment B that survives, and not A.Show how a revision of Fig 8.4 could still result in an increase in real wages for a capital-abundant country.

B’