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Chapter_4_New_Trade_Models

Parts components and services that are produced in

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parts, components, and services that are produced in multiple countries. Outsourcing is the trade in intermediate inputs , which can sometimes cross borders several times before being incorporated into a final good. Outsourcing is a relatively new phenomenon as the costs of transportation and communication have fallen so much that it is now economical to combine resources from many countries to produce a good or service.
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Is Trade Today Different From the Past? There is more trade and the type of trade has changed. If we organize trade into five categories we get: (i) foods, feeds, and beverages; (ii) industrial supplies and materials; (iii) capital goods; (iv) finished consumer goods; and (v) automobiles .
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Is Trade Today Different From the Past? Figure 7.1 (a)
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Is Trade Today Different From the Past? Figure 7.1 (b)
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Is Trade Today Different From the Past? The share of capital, consumer, and automotive goods has increased from 10% of imports and 20% of exports in 1925 to 65% in 2005. These goods are much more likely to have the production sent overseas through outsourcing. Given the changes in the share of trade in these products, we can see that the type of trade has changed greatly from the past.
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A Model of Outsourcing To develop the model of outsourcing, we need to distinguish all the activities used to produce and market a good or service. Figure 7.2 (a) describes the activities in the order in which they are performed. However, for outsourcing, it is more useful to look at the activities according to the ratio of skilled to unskilled labor they use which is shown in figure 7.2 (b).
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A Model of Outsourcing Figure 7.2
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A Model of Outsourcing Value Chain of Activities The whole set of activities we just described is sometimes called the value chain for the products. Some of the activities can be transferred to other countries when it is more economical. By looking at activities in terms of their relative amount of skilled labor, we can predict which ones are likely to be transferred abroad.
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A Model of Outsourcing Because the U.S. is abundant in skilled labor, it will make sense for the firms to send the most unskilled- labor intensive activities abroad and keep the more- skilled labor intensive activities at Home.
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