Lecture08Spring09 Page 1

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1 ecture08pring09 Page 1 Internal Evaluation Comments: ecturing tyle All in all you are very good, but if you could rite more of the explanations in ords hen you only say it e don't alays get to rite it don...nice to have a teacher ho demands participation from the students. The level of the lectures is rather lo, You use a lot of time on standard, trivial microeconomics problems, hen time should be spent on international economics. I'd like to have some time, during the lessons, to do exercises aimed at the final exam I'd like to kno hat extent e need to kno calculus Don t kno hy, but don't really find the class as exciting as expected. I really like that you encourage students to participate. You are enthusiastic hich transmit to the audience (just a shame that lectures are held so late. Increase the level of the revie questions.

2 ecture08pring09 Page 2 Presentation Using Microsoft onenote is a great idea! The notes publicizeed on the eb are great. I love your magic board. Allos us students to focus on listening and understanding rather than having to rite don all that you do since the notes are available online. I still miss the possibilities to add details to the notes on my on maybe you could even post the notes on the homepage in advance. Textbook The level of the textbook is ridiculous, it is much too easy! The textbook is absolute rubbish it is much too easy. The textbook is all to simple. I ould have liked to do exercises here e ere to calculate some of the stuff ourselves. I don't understand the great difference beteen the very intuitive curriculum in the textbook and the more technical approach in the lectures. Exam if I can make the exam just ith my knoledge of Macro and Micro economics.. I'd like explanations about the exam. I ould be nice to see some old exam questions. Maybe post a question on the ebpage, and then go through the question next class.

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4 ecture08pring09 Page 4 Revie questions Consider the reciprocal dumping model of Brander & Krugman No, ith market demand: p Z AZ At hat iceberg transportation cost levels ould international trade occur? 1 1 g 1

5 ecture08pring09 Page 5 A short revie Trade in final goods: Model Explanation for hy trade arises Trade in factors: Model Explanation for hy trade arises

6 ecture08pring09 Page 6 Trade in Intermediate goods $90 thousand labor $150 thousand capital teel $30 thousand capital leather $1 million orth of cars exported $40 thousand labor $200 thousand capital $100 thousand labor Outsourcing: Book Definition (page 228): The provision of a service or the production of various parts of a good in different countries that are then used or assembled in a final good in another location. imple Definition (page 228, 4 lines don): The import of an intermediate good. U.. Imports and Exports,

7 ecture08pring09 Page 7 Outsourcing model 2 Countries: Denmark and Finland 3 factors: killed and Unskilled abor, capital K,, Wages: W W W W r r * * * W W W W * * Perfectly competitive Firms have n steps in production Example: ego = {Plastic, paint, molds, assembly machines, packaging, design} Y n i1 q i s l qi s,, l k f min,, k ai a i a1 a2 an... a a a 1 2 n Cost of producing 1 unit of intermediate good i in Denmark: Cost of producing intermediate good i in Finland: hould this firm outsource good i?

8 Cost avings as a function of intensity: ecture08pring09 Page 8

9 ecture08pring09 Page 9 Outsourcing: avings versus Costs avings /costs * outsourcing cost: r r k i Firms in the richer, skilled labor endoed country ill outsource the least skill intensive steps of production.

10 ecture08pring09 Page 10 Factor Demands Y n i1 q i s l qi s,, l k f min,, k ai a i Wage = Price * Marginal Value of abor

11 ecture08pring09 Page 11 Relative demand Relative demand

12 ecture08pring09 Page 12 What if foreign outsourcing capital costs decrease? avings /costs * r r k i=j / s n a i ij1 n a i ij1 * * i i1 * * j ai i1 j a Relative demand Relative demand

13 ecture08pring09 Page 13 Example: suppose a a i i i 101i Conclusion: As outsourcing becomes easier, the least skill intensive activity still done at home is outsourced to foreign. This raises the average skill intensity demanded in both foreign and home. The relative skilled age is thus raised in both.

14 ecture08pring09 Page 14 Evidence? killed relative to unskilled Possible causes: Employments shares of skilled orkers: Berman, Bound, & Griliches, 1994 Time period %change per year Beteen industries Within an Industry Bernard and Jensen, 1997 Time period %change per year Beteen plants Within a plant

15 ecture08pring09 Page 15 Gains from outsourcing Focus on to of the n steps: Research&Development and Components Manufacturing. No outsourcing With Outsourcing Price of final good? P* Y (Total Cost) Who gains? killed orkers: Unskilled orkers:

16 ecture08pring09 Page 16 Revie Questions Folloing the formation of NAFTA, hat as expected to happen to ages of unskilled labor relative to ages of skilled labor in Mexico and in the United tates as U.. outsourcing occurred? The table gives U.. and Indian labor requirements (hours per unit of output) needed in each of four activities to produce the final product. If trade costs are zero, hich operations ill the United tates outsource to India? The table gives U.. and Indian labor requirements (hours per unit of output) needed in each of four activities to produce the final product. uppose that trade costs represent 25% of age costs in India. No hich operations ill the United tates outsource to India? What is the root of the apparent contradiction in Paul amuelson's statements regarding the benefits of trade and the results of the theories discussed in the book?