Question

The logic of service outsourcing - The Ricardian model

It is sometimes argued in editorials or TV commentaries that the modern wave of outsourcing, especially outsourcing of services to India, defies the logic of the Ricardian model. Let’s examine if this is actually the case.

The following table presents information on labor productivity in computer component production and call center services in Canada and India. Assume that Canada has an absolute advantage in both.

To complete the following table, choose the number of calls that would be most plausible and consistent with the reality of outsourcing services to India, and indicate the good in which each country has a comparative advantage.

Country	Production per Employee		Comparative Advantage
	Computer Components	Call Center Services
	(Units per hour)	(Phone calls per hour)
India	2	(5, 1, 2, 14)???	(computer or call center)???
Canada	14	7	(computer or call center)???

Does the observed pattern of outsourcing from Canada to India, where India exports___________________________(call center services, computer components, neither, or both) , defy the logic of the Ricardian model?

Yes

or

No

Answer 1

Because Canada has an absolute advantage in the production of both goods. This implies that Canada can produce more of both goods with given resources. Therefore, India should produce less than 7 phone calls per hour. It should be 2 phone calls per hour , so that one country has a comparative advantage in one good.

Country	Production per employee	Production per employee
	Computer components (Units per hour)	Call center services (Phone calls per hour)	Comparative advantage
India	2	2	Call center services because it has the lower opportunity cost i.e 2/2=1 unit of computer component in the production of call center services.
Canada	14	7	Computer components because it has the lower opportunity cost i.e 7/14=0.5 phone calls in the production of computer components.

No ,the observed pattern of outsourcing from Canada to India, where India exports call center services in which it has a comparative advantage ,doesn't defy the logic of the Ricardian model.