Consider an offshoring model in which Home’s high-skilled labor has a higher relative wage than Foreign’s high-skilled labor and in which the costs of capital and trade are uniform across production activities.

(a) Will Home’s offshored production activities be high or low on the value chain for a given product? That is, will Home offshore (i.e., outsource) activities that are high-skilledlabor-intensive or low-skilled-labor-intensive? Depict the slicing of the value chain for the home country and briefly explain in words.

(b) Suppose that Home uniformly increases its tariff level, effectively increasing the cost of importing all goods and services from abroad. How does this affect the slicing of the value chain? Answer by depicting the original slicing of the value chain as “A” and the new slice as “B”.

(c) Draw relative labor supply and demand diagrams for Home and Foreign showing the effect of this change. What happens to the relative wage in each country?