The Impact Of Offshoring On Both High Skilled And Low Skilled Workers During Developing Countries Through Examining The Heckscher Ohlin Model
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With India’s movement to eliminate trade barriers, and China’s decision for economic reforms since the 1990s, there have been significant changes in the composition and size of the global economy. Ever since the joining of workers from developing countries, the international labor pool has seen approximately twice the size than before. On one side, this is beneficial for high-skilled workers and firms in advanced countries, as they enjoy more trading opportunities, higher labor demand, and lower production costs through offshoring and outsourcing. On the other side, the influx of low wage labor (from developing countries) has brought competitions and may pose a threat to workers in the developed world, as argued by Richard Freeman in “The…show more content… Let us consider that there are two countries, Advanced and Developing. Each country has two industries, research and development (R&D) and components productions. The two factors of production being considered are high-skilled and low-skilled labors. We assume that R&D uses high-skilled workers more intensively, and components production uses low-skilled workers more intensively. It is reasonable to assume that the Advanced is relatively richer in high-skilled workers than the Developing, as more people are receiving higher level education. This model assumes that technologies are the same across countries, and the two factors of production being considered can move freely across industries.
Refer to Fig.1, before trading and offshoring, Advanced is producing at point A on the production possibility frontier. It uses QR quantities of R&D resources and QC quantities of components, to produce Y0 amount of final goods. The straight line represents the relative price of components to R&D, which measures the value that Advanced places on components relative to R&D. Now with offshoring, there is a single world relative price. As the economic theory of Factor Price Equalisation states, trade establishes a single world price for the same good, and sets the same price for identical factors of production across countries (Sameulson, 1948). As a result, the Advanced produces more R&D and fewer components as shown by point