A North–South model of outsourcing and growth

Yuki Saito

Review of Development Economics, 2018, vol. 22, issue 3, e16-e35

Abstract: In this paper, I formulate a simple North–South R&D‐based growth model where final goods firms in the North endogenously determine the range of international outsourcing of intermediate goods to the South. I show that a fall in the trade cost (through trade liberalization) of intermediate goods in the North: (i) reduces the wage of the North relative to that of the South; (ii) increases the outsourced variety of intermediate goods in the North; and (iii) stimulates Northern R&D activity and economic growth in both countries. By conducting welfare analysis, I also show that a decline in the trade cost of intermediate goods in the North improves welfare in the South more than in the North.

Date: 2018
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