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1. Consider an offshoring model of trade between the US and Mexico. There are four activities. Any of these activities may be done in the US or Mexico. Using the table below note the differences in labor productivity and wage rates in each category. Look at the trade-off between keeping each activity in the US versus offshoring to Mexico with additional trade costs of 0%, 10%, 20% and 40% for work done in Mexico to cover transportation, tariffs and other requirements. For each activity, state which should be performed in the US and which in Mexico for each set of trade costs. Show you work by completing the table. The Labor hours are the number of hours required to complete each activity in Mexico and the US respectively. The wage rates are the hourly wage rates in each country. Use the excel template provided separately. Once you have completed the spreadsheet, determine where the value chain is divided at costs of 0%, 10%, 20 % and 40%. Put the appropriate location in the Lowest Cost Production cell. Trade Cost Question 1 Mexico US Imported by US, 0% Trade Costs Lowest Cost Location Imported by US, 10% Trade Costs Lowest Cost Location Imported by US, 20% Trade Costs Lowest Cost Location Imported by US, 40% Trade Costs Lowest Cost Location Labor hours: Mexico Low-skill Mexico High-skill US Low-Skill US High-Skill Wage Rates: Mexico Low-skill Mexico High-skill US Low-Skill US High-Skill is es es es $ $ $ $ Assembly 245 20 1 1.75 $ 6.00 $ 12.00 $ 24.00 $ Component Production 443 14 1 Office Services 1.75 $ 6.00 $ 12.00 $ 24.00 $ 12 7 4 1 1.75 $ 6.00 $ 12.00 $ 24.00 $ R&D 5 35 1 00 8 1.75 6.00 12.00 24.00