Consider the numerical example we gave in class that help us to decide where to slice the value chain. Now consider a third scenario:
Mexican wages: wS*=$5, wL*=$1.
U.S. wages: wS=$25, wL=$5.
Mexican assembly: skilled=4, unskilled=20
U.S. assembly: skilled=1, unskilled=5
Mexican R&D: skilled=40, unskilled=4
U.S. R&D: skilled=10, unskilled=1
Trade costs = 50%.
(a) Suppose you are the manager of a U.S. firm and you are trying to locate the two tasks you have at hand-assembly and R&D, to the country that produces it at a lower costs.
Fill the blank cells in the following table with the costs of production. Hint: remember the (iceberg) trade costs.
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Assembly
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R&D
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United States
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Mexico
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(b) Where would you put the tasks? Note that in this scenario, the third assumption about labor market is violated-now, Mexico and U.S. has the same skill-premium.