INTERNATIONAL OUTSOURCING,THE REAL EXCHANGE RATE AND EFFECTIVE DEMAND

We develop a two‐country model of international trade with outsourcing opportunities, and analyze the effects of outsourcing on employment and effective demand under stagnation. Increased outsourcing proves not only to lower employment but also to depreciate the real exchange rate which has the effect of boosting employment. The latter also dominates the former, such that employment and consumption are stimulated. The home and foreign countries respond in opposite ways, however, to the production shift and the real exchange rate adjustment. Furthermore, we find that the effects of outsourcing on consumption are opposite in the presence, and the absence, of unemployment.