A Simple Two-Sector Model of Outsourcing

Outsourcing has become an increasingly contentious subject ever since N. Gregory Mankiw remarked in 2004 that outsourcing is just another way of doing international trade, and must be beneficial to the nation, including the workers. We construct a simple two-sector specific-factor model and explore the validity of Mankiw's remarks. We find his ideas are valid when the country does not produce any outsourced factor's work at home in that both the laborers and the nation benefit. But when some outsourced factor cum intermediate good is also produced at home, the nation still benefits but the workers may suffer.