Outsourcing and the Heckscher-Ohlin Model

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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