OFFSHORING AND OUTSOURCING
Outsourcing – another firm does part of the other company’s business. Offshoring – same company, outside of the U.S. Offshoring and Outsourcing-Different company outside of the U.S. Off-shoring became a concern in the 1980s. Modern communications and transportation technology made it possible for firms to relocate production abroad. The effects and extent of off-shoring are not well understood since most countries do not collect the necessary types of data motivation. Trade in services should be no different from trade in goods. Specialization and trade should provide the same or similar gains for services as they do for goods. Conventional wisdom: firms relocate abroad in order to find low wages or escape environmental/labor regulations.
Concerns: Effect off-shoring has on home country, particularly on jobs. Possibilities: Job losses in the home country or at other times. Evidence: Most firms locate production offshore in order to obtain access to a market and to produce specialized products that fit a particular market’s need contrary to the conventional wisdom that says firms relocate abroad in order to find low wages or escape environmental/labor regulations. Conventional wisdom is not wrong but describes only a small share of offshoring. The vast majority of off-shoring by U.S. multinationals is in high-income, high-wage economies (67% overall and 80% manufacturing). Additionally, most offshoring are…Graph. Monopoly has no incentive to drop the price. Internal-8 per unit depends on the size of the firm. External-size of the industry but not on the size of any 1 firm: If America A concentrates production in Industry A, it will need more labor: That labor will have to come from an industry B. Industry B will have to decrease or stop production.
Where does trade enter? Consumers still want a variety of goods. British can shift labor form its dominant industry A to industry B. Each country must concentrate on producing only a limited number of goods. International trade makes it possible for each country to produce a restricted range of goods and take edge econ of Q without sacrificing variety in consumption. Graph However….Economies of scale lead to a market structure other than that of perfect competition. Internal economies of scale giver larger firs a cost.
Theory of Imperfect Competition: Firms are aware they can influence the prices of their price setters
Monopolistic competition: Assumptions: Each firm differentiates its products from rivals. Gives each firm differentiates its products from rivals. Insulates each firm somewhat from the competition. Takes rivals: price as given (they can’t influence it-changing their price doesn’t change rival’s price). Ex, possibly automotive industry in Europe Ford, GM, VW, RENAULT, VELVO. Limitation: few industries well described by MC
Equilibrium in MC
The more firms there are the more intensely they compete, and the lower industry price (PP). Less each firm sells, higher their costs (CC)
MC and Trade
In industries with economies of scale, market size matters because of market size constraints the variety of goods that a country can produce and scarce of its production. Trade forms an integrated market bigger than any individual market and loosens constraints. Trade=opportunity for gain even if countries don’t differ in technology (Ricardo) or resources.
Increased Market Size. The number of firms in the MC industry the prices they charge are affected by the size of the market. Larger markets lead to more firms, more sales to firms, move a variety of products, lower prices, but it is unclear it firms will locate in the domestic country or foreign country. Trade allows us to have a huge variety in our lives. An increase in the size of the market allows each firm to produce more and have lower AC. The downward shift of CC. Leads to more firms, more variety, lower price. Possibility to increase the whole market.
EOS and Comparative Advantage
Results: Gains from inter-industry trade reflect comparative advantage. Gains from intra industry trade reflect economies of scale (lower costs) and wider consumer choices
The monopolistic competition model does not predict in which country firms locate, but a good comparative advantage in producing differentiated good will likely cause the country to export more of that good than it imports
How important intra-industry trade depends on similarities of Countries with similar relative amounts of factors of production are predicted to have intra industry trade. Different relative amounts of FDP interindustry unlike interindustry trade on the H-O model, income distribution effects are not predicted to occur with an intra-industry trade. 25 % of world trade is an intra-industry trade. Some industries are=more than others. Industries requiring skilled labor, technology, and physical capital-intra industry trade for the US.
Grubel-lloYD Index
The broader the definition of an industry, the more trade appears to be intraindustry trade
GLi=1-! X-M! /X+M
Closer to 1:a lot of intra
Closer to 0: little number of intra
The are many benefits of intra-industry trade. Export/import prices lower because firms can lower their costs by producing for a larger market. In previous models, import prices decrease but export prices increase. Also the number of firms increases, so employment increases. Could be in either country, however. Consumer choice increases. Fewer income redistribution effects
Dumping is a consequence of imperfect competition. It is beneficial to firms because of monopolistic competition. Why would you sell to foreign more? Because they can differentiate the price. An incentive means higher marginal revenue. Because higher domestic market that foreign (typically) because international markets are imperfectly integrated due to both transportation costs and protectionist trade barriers. Means foreign sales are more affected by their pricing than domestic sales. Firms have less monetary power in foreign markets. Economies of scale to lead to increasing of international trade, lead to imperfect competition. Imperfect competition has consequences for international trade. Most striking result: firms do not necessarily charge the same price for goods that are exported and those that are sold to domestic buyers. Dumping is when a foreign country selling goods in another country for below cost. Example of price discrimination-different customers, different prices. A controversial issue in trade policy. Widely regarded as “unfair”. Subject to special rules and penalties
Price Discrimination and dumping may occur if Imperfect competition exists: firms must be able to set market prices rather than take them as given
International economics is divided into two broad subfields: international trade and international money. Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of international trade analysis. In 2005, total world imports were estimated to be 20.5 % of world gross domestic product (GDP). The current process of increasing economic integration among national economies, better known as globalization, is actually the world’s second wave of such integration. Examples in international factor movement: Direct foreign investment, labor migration, international borrowing, and lending. The measures economists examine to assess the degree of globalization and international economic integration: similarity of prices in separate markets, factor movements, and trade flows. The U.S. economy today appears more integrated with the world economy as signified by its increased index of openness. An indicator that today the U.S. Economy is less integrated with the world than it was a century ago is its reduced proportion of foreign-born citizens. “Openness” is the relative importance of trade to a national economy; (Exports + Imports)/GDP. Small countries tend to be more open than in larger countries. Three kinds of evidence that economists use to support the assertion that open economies grow faster than economies that are close to the world economy:
1) Evidence of statistical comparison of countries-statistical tests of the relationship between trade policy and economic growth yield results that consistently show that more open economies grow more rapidly
2) Casual empirical evidence of historical experience-countries with the same background that was divided by the war indicate that those who closed their economies from the rest of the world suffered
3) Economic logic and deductive reasoning-Open trade fosters competition, innovation, and learning by doing and brings international best practices to the attention of domestic producers, spurring greater efficiency, export expansion, and economic growth
4) Current day trade different than earlier trade: the share of manufacturing trade has risen, while the share of agricultural trade has fallen and the fraction of current international trade is organized and conducted by multinational firms has grown since 1950
Industrial Policy is a government policy assigned to create/support industry. Many have come not to believe in this policy, but there are justifications for this reason.
Market Failure=when market fails to deliver an optimal quantity of goods and services
- The value of a good to private consumers (private returns) and to society (social returns) fails to equal to its cost of production
- Not all costs/benefits of an activity, some are an externalized-outside area of concern of economic agents engaged in an activity
- Externalities-market failure that results from the externalization of costs of benefits
The government needs to step in: all costs of regulation
When social returns > private returns, the free-market economy produces less than the optimal amount
- Not all benefits are captured by the firm, so they are not included when making a production decision
When social returns < private returns, a free-market economy produces more than optimal outputs
Ex: positive externality: live next door to the orchestra
- Either too much negative is produced or not enough positive is produced
GRAPH EXAMPLE
Justification 2
Strategic Trade Policy
- Selective use of trade barriers and industry subsidies in order to capture some of the profits of foreign firms
Requires that: the industry has economies of scale, firms in the industry have market power
- Tries to convince foreign firms to leave the market
- Game theory:
The importance of Industrial Policy tools is one that has become ever-present in today’s global economy.
The Uruguay round and WTO prohibit direct subsidies. However, they can subsidize “pre-competitive” activities (like research).
Governments can use other policies. Providing info about foreign markets to domestic firms. Helping negotiate contracts. Lobbying foreign governments to adapt to home country standards. Trying foreign aid to purchases from domestic firms. Also seen: discounted foreign currency, low-interest plans, special tax treatment, government purchases.