Outsourcing and the Heckscher–Ohlin Model |
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| Authors: | Ravi Batra Hamid Beladi |
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| Institution: | 1. Department of Economics, Southern Methodist University, Dallas, USA;2. Department of Economics, One UTSA Circle, College of Business, University of Texas at San Antonio, San Antonio, USA;3. We are grateful to two anonymous referees for constructive and insightful comments on earlier versions of this paper. |
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| Abstract: | The purpose of this paper is to incorporate the currently mushrooming phenomenon of outsourcing into the standard two‐sector, two‐factor Heckscher–Ohlin model of international trade. We first show how outsourcing modifies a firm's production function, and then demonstrate that outsourcing generally raises the return to capital and lowers the real wage, although the nation's GDP rises in proportion to the value‐added in the outsourcing industry. Furthermore, the output of the outsourcing sector may actually fall even though its unit cost goes down; the output of the other sector then rises. By contrast, employment in the outsourcing sector may actually rise. |
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