Question

Attempts: Average: 12 9. 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 Pakistan, 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 the United States and Pakistan. Assume that the United States 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 Pakistan, and indicate the good in which each country has a comparative advantage. Production per Employee Computer Components Call Center Services (Units per hour) (Phone calls per hour) Country Comparative Advantage The United States Pakistan Does the observed pattern of outsourcing from the United States to Pakistan, where Pakistan exports defy the logic of the Ricardian model? Yes No

Answer 1

The US can produce 16 computer components or 8 phone calls per hour. Hence, the opportunity cost of 1 call is 16/8 = 2 computer components

If Pakistan had to have comparative advantage in call center services, it must have a lower opportunity cost of making a call. Hence the opportunity cost of 1 call should be less than 2 computer components. This gives 3/x < 2 or x > 1.5. Hence the required value in the bottom right cell of the table can be any value more than 1.5 (say 2).

Now the US has comparative advantage in computer components and Pakistan has comparative advantage in call center services.

Pakistan exports call center services and the answer is compatible with Ricardian model so the answer is NO.