International Outsourcing, the Real Exchange Rate and Effective Demand

Abstract

We develop a two-country model of international trade with outsourcing opportunities, and analyze the effects of outsourcing on employment and effective demand under stagnation. Increased outsourcing proves not only to lower employment but also to depreciate the real exchange rate which has the effect of boosting employment. The latter also dominates the former, such that employment and consumption are stimulated. The home and foreign countries respond in opposite ways, however, to the production shift and the real exchange rate adjustment. Furthermore, we find that the effects of outsourcing on consumption are opposite in the presence, and the absence, of unemployment.

A simple aggregate demand analysis with dynamic optimization in a small open economy

“…There are open-economy extensions of the dynamic stagnation model, e.g. Ono (2006Ono ( , 2007Ono ( , 2014Ono ( , 2018, Johdo and Hashimoto (2009) and Hashimoto (2011Hashimoto ( , 2015, but they use a two-country setting and have much more complicated frameworks. The present analysis treats a small country case and has a simple structure comparable to the Mundell-Fleming model.…”

Tariffs, Offshoring and Unemployment in A Two-Country Model

“…A study close to ours is Hashimoto (), who considers offshoring in a stagnation economy and examines the effects of an exogenous change in a Leontief production technology. In this setting, however, tariff policy does not affect offshoring activity, because there is no substitution between home factors and offshoring factors.…”