Question

8. The logic of service outsourcing The Ricardian model s 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. Production per Employee Computer Components Call Center Services Country(Units per hour)(Phone calls per hour) Comparative Advantage India Canada 18 Does the observed pattern of outsourcing from Canada to India, where India exports support the logic of the Ricardian model? Yes No

Answer 1

Since Canada has an absolute advantage in both goods,

absolute advantage in call center services means that

No. of phones call in India per hour = c where 0 < c < 9

Also for outsourcing service work,

India should have comparative advantage in production of phone calls while Canada should have comparative advantage in production of computers.

Thus, opportunity cost of producing computers in Canada < opportunity cost of producing computers in India

$\small \frac{18}{9} < \frac{3}{c} \Rightarrow c < 3*\frac{9}{18} \Rightarrow c < 1.5$

Plausible value of c = 1 taking care of both conditions.

Comparative Advantage:

India: Phone calls

Canada: Computer components

India exports phone calls, and logic of Ricardian model is supported.